Republic of Indonesia Stability at the Forefront, Synergize Reforms Move October 2018 About Investor Relations Unit of the Republic of Indonesia

Investor Relations Unit (IRU) of the Republic of Indonesia has been established as a joint effort between Coordinating Ministry of Economic Affairs, Ministry of Finance and Bank Indonesia since 2005. The main objective of IRU is to actively communicate Indonesian economic policy and to address concerns of investors, especially financial market investors.

As an important part of its communication measures, IRU maintains a website under Bank Indonesia website which is administered by International Department of Bank Indonesia. However, day-to-day activities of IRU are supported by all relevant government agencies, among others: Bank Indonesia, Ministry of Finance, Coordinating Ministry for Economic Affairs, Investment Coordinating Board, Ministry of Trade, Ministry of State Owned Enterprises, Ministry of Energy and Mineral Resources and Financial Services Authority.

IRU also convenes an investor conference call on a quarterly basis, answers questions through email, telephone and may arrange direct visit of banks/financial institutions to Bank Indonesia and other relevant government offices.

Published by Investor Relations Unit – Republic of Indonesia Website: http://www.bi.go.id/en/iru/default.aspx Contact: Wiwit Widyastuti (International Department - Bank Indonesia, Phone: +6221 2981 8279) Evy Mulyani (Fiscal Policy Office - Ministry of Finance, Phone: +6221 345 0012) I Gede Yuddy Hendranata (Directorate General of Budget Financing and Risk Management - Ministry of Finance, Phone: +62213510714) E-mail: [email protected]

This Presentation Book also can be downloaded from: http://www.bi.go.id/en/iru/presentation/red/Default.aspx

1 What’s New in This Edition

2019 State Budget (2019 Budget) The House of Representatives (DPR) has approved the 2019 state budget on Wednesday, October 31st, 2018 …page 39

Domestic Non Deliverable Forward (DNDF) Transaction Bank Indonesia has introduced Domestic Non-Deliverable Forwards (DNDF) transactions in order to accelerate forex market deepening while providing alternate hedging instrument for banks and corporations (fully implemented on November 1st, 2018). …page 66, 67, 68

2 Overview

Institutional and Governance Effectiveness: Fiscal Performance and Flexibility: Accelerated Reforms Agenda with More Fiscal Stimulus with 1 Institutional Improvement 4 Prudent Fiscal Management

Economic Factor: Monetary and Financial Factor: Strong and Stable Growth Prospects Credible Monetary Policy Track Record 2 Remain Intact 5 and Favourable Financial Sector

Progressive Infrastructure Development: External Factor: Strong Commitment on Acceleration Improved External Resilience 3 6 of Infrastructure Provision

3 Section 1 Institutional and Government Effectiveness: Accelerated Reforms Agenda with Institutional Improvement Improving Global Perception …with recent improvements on global competitiveness and governance indicator

Global Competitiveness Index1 Ease of Doing Business2

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Rank 0 20 Higher rank is better (rankings at the time of annual report publication) 20 Higher rank is better 40 30 36 41 45 60 40 72 80 50 91 100 60 120 70 *New Concepts by using the Global 140 80 Competitiveness index 4.0 which captures the determinants of long- 160 90 term growth. India Indonesia Philippines Bulgaria Colombia Indonesia India Philippines Bulgaria Colombia

World Governance Indicators3 Corruption Perception Index4

55 53 44 Higher score is better 50 50 42 43 40 39 38 37 37 35 33 36

34

Higher rank is better 32 15 30 2010 2011 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 2017 Voice and Accountability Political Stability/Absence of Violence Government Effectiveness Regulatory Quality Indonesia India Philipines Bulgaria Colombia Rule of Law Control of Corruption

1. Source: World Economic Forum –The Global Competitiveness Report 2018; 2. Source: World Bank – Doing Business Report; 3. Source: World Bank; 4. Source: Transparency International – Corruption Perceptions Index 2017 Report 5 Indonesia is Now Fully Rated as Investment Grade Country

BBB / Stable

Sept 2018, BBB, Rating Affirmed “Indonesia's ratings balance a low government debt burden and a favourable GDP growth outlook with external challenges, including a strong dependence on external sources of financing, and several structural indicators that remain below rating peers.”

BBB- / Stable

May 2018, BBB-, Stable Rating Affirmed “The sovereign ratings on Indonesia are supported by the government’s relatively low debt levels and its moderate fiscal performance and external indebtedness.”

Baa2 / Stable Apr 2018, Baa2, Rating Upgraded “The upgrade to Baa2 is underpinned by an increasingly credible and effective policy framework conducive to macroeconomic stability. Together with a build-up of financial buffers, prudent fiscal and monetary policy strengthens Moody’s confidence that the sovereign’s resilience and capacity to respond to shocks has improved.”

BBB / Stable BBB / Stable

March 2018, Rating Upgraded to BBB, Outlook Revised to Stable February 2018, Rating Upgraded to BBB, Outlook Revised to Stable “Indonesia's economy continues its strong performance, with inflation remaining low “....the government led by President Joko Widodo has been pressing ahead with structural and stable. Fiscal deficits have been reined in, and government debt is low. The reforms aimed to promote sustainable growth.. First, the investment climate has significantly economy is becoming more resilient to external shocks, reflecting small current improved.... Second, infrastructure development has been gaining momentum... Third, the account deficits and ample foreign reserves.” external debt owed by the private sector has been curbed since 2016... Taking those into consideration, JCR has upgraded its ratings by one notch and changed the outlook to Stable. 6 Indonesia Remains the Investment Destination of Choice

The Economist: Indonesia rounds out the top five of Asian economies that can look forward to increased investment spending. (January 2018)1 Indonesia Enjoys Large Investments Relative to Peers within the Region2 40 China 69.4 India 47.1 35 Indonesia 44.1 30 Vietnam 36.9 Singapore 30.6 25 Australia 30.1 Hong Kong 28.8 20 Thailand 28.7 15

South Korea 28 Investment / GDP (%)InvestmentGDP/ Japan 26.6 10 Philippines 24.7

Malaysia 24.3 Total 5

31.69 32.04 33.85 33.45 33.90 25.87 25.46 25.39 24.28 25.03 26.21 21.08 22.84 24.18 26.58 26.57 27.85 Myanmar 20.2 30.35 0 Taiwan 18.2 India Indonesia Malaysia Philippines Thailand Vietnam 0 10 20 30 40 50 60 70 80 2016 2017 2018e

UNCTAD: Indonesia is listed in the top 20 host economies based on FDI JBIC: Among ASEAN countries, Indonesia is one of the most preferred place inflows, 2016 and 2017 (June 2018)3 for business investment (November 2017)4

500 China 45.7 450 India 43.9 2016 2017 400 Vietnam 38.1 350 Thailand 34.5 300 Indonesia 33.1 250 USA 26.1 200 Mexico

BillionUSD 18.2 150 Philippines 10.6 (x) = 2016 ranking 100 Myanmar 9 50 Brazil 6.3 0 Korea 6.3 Malaysia 5.9 Russia 4.3 Singapore 3.8 % of surveyed who consider each country has promising prospects Turkey 2.7 0 10 20 30 40 50

1. Source: The Economist – Asia Business Outlook Survey 2018 3. Source: United Nations Conference on Trade and Development (UNCTAD) – World Investment Report 2018 2. Source: IMF World Economic Outlook, Database April 2018 4. Source: JBIC – Outlook for Japanese Foreign Direct Investment (29th Annual Survey) 7 National Strategic Development Plan (Nawa Cita)

The 3 Dimensions on Economic Development

Priority Sector Human Development Development Equitable Development

Food Security Education Inter- Income Group

Energy & Electrical Security Health Inter-Region: Maritime & Marine (1) Rural Area, Housing Tourism & Industry (2) Periphery, (3) Outside Java, Character Water Security, Basic Infrastructure & Connectivity (4) Eastern Area.

Necessary Condition

Legal Certainty & Security & Order Politic & Democracy Governance Law Enforcement

8 Economic Equality Policies to support sustainable public welfare...

• Build a fair land distribution scheme • Build a priority scale of Tanah Objek Reforma Agraria (TORA) recipient based on land gini ratio, Agrarian Reform poverty, & land demand Economic • Developing an agricultural industry by agglomeration or cluster method Equality • Define Lahan Pertanian Pangan Berkelanjutan LP2B to prevent land usage for non-agriculture Agriculture (Landless purposes Policies • Land consolidation for agriculture Farmer) • Improve research on seeds and agriculture method, off-farm infrastructure, integrated logistic system, build seeds market, tools and machinery • Data collection & law enforcement on palm oil land area, including land bank data collection Land • Building a database and arranging policy on planting non-agriculture commodities Plantation • Improve cooperative performance by encouraging SOEs and private sectors involvement • Research support, market synergies, off-takers, and supply chain on downstream business • Social Housing Urban Poor & Affordable • House financing Housing • Land banks and affordable land prices • Law enforcement on spatial policies

Fishermen & Seaweed • Integrating fishing and seaweeds sectors • Improve and support aquaculture industry and fishery sector value chain Cultivation • Encourage Private sector investment on seaweed sector (process and off-taker)

• Develop and improve progressive tax, capital gain tax and tax on unutilized asset Fair Tax System • supporting fiscal spending

• Developing natural resources industries and value chains Manufacture and ICT • Minimize interest gap between large companies and small companies • Protect market share from integrated businesses and strong capital Opportunity • Regulate and build a database on traditional/modern market, traditional and modern shops • Regulate the distances, location, and zone of the market and modern stores Retail and Market • Compulsory mandates to maximize the usage of Local products • Fair access to the logistic system

Financing & Government • Improving Kredit Usaha Rakyat (KUR) scheme to support non-bankable SME Budget • Improving procurement scheme to support SME accessibility to finance

• Identified and built priority scale on sectors, sub-sectors of leading industries and profession Vocational, Human Resource • Improving link and match scheme between industries and vocation Entrepreneurship & Labor • Early childhood education Capacity Market • Encourage education system to be more skill, collaborative, flexibility and impact oriented instead of degree consideration

Source: Coordinating Ministry for Economic Affairs Priority 9 The Economic Policy Packages

“To improve national industry competitiveness, export and investment to generate significant economic growth”

Harmonizing Regulations Simplifying Bureaucratic Process Ensuring Law Enforceability

Phase I (9 Sept ’15) Phase VIII (21 Dec ’15) Improving national industry competitiveness Resolving land acquisition disputes, intensifying domestic oil Phase II (29 Sept ’15) production, stimulating domestic parts and aviation industries Easing permit requirement and simplifying export proceeds Phase IX (27 Jan ’16) requirement Accelerating electricity generation, stabilizing meat prices and Phase III (7 Oct ’15) improving rural–urban logistics sector Financial services facilitation, export financing and elimination Phase X (11 Feb ’16) of business unnecessary burden Revising the Negative investment List and improving protection for SMEs Phase IV (15 Oct ’15) Social safety net and betterment of people welfare Phase XI (29 Mar ’16) Stimulating national economy through facilitation to SMEs Phase V (22 Oct ’15) and industries Improving industry and investment climate through tax incentives and deregulation on sharia banking Phase XII (28 Apr’16) Improving Indonesia’s rank on Ease of Doing Business (EODB) Phase VI (5 Nov ’15) Stimulating economic activities in border areas and facilitating Phase XIII (24 Aug ’16) strategic commodities availability Low Cost Housing for Low-Income Communities Phase VII (7 Dec ’15) Phase XIV (10 Nov ’16) Stimulating business activities in labor-intensive industries Roadmap for E-commerce nation-wide through incentives in the form of accelerating Phase XV (15 Jun ’17) land certification process for individuals Improving logistics

In addition to the 15 Policy Packages, on August 31, 2017 the Government has issued a Presidential Regulation No.91/2017 for enhancing business license service standard

Source: Coordinating Ministry for Economic Affairs 10 Boosting the Competitiveness through Logistical Efficiency The 15th Economic Policy Package has been launched

Policy Goals Policy Targets

Import duty for 115 types of ship’s spare 1 parts and components 0%

Opportunities for national shipping to serve export Strengthen the Institution and import transportation of around of the Indonesia National 2 Single Window (INSW) USD 600 million/year

70-100 units of new ships worth USD 700 million Increase Competitiveness 3 of Logistic Service Providers New employment opportunity of 4 2,000 sailors

Provide Market Opportunities Improve the Regional Government’s role for Shipping Companies, in development of Regional Logistics Marine Insurance, and National 5 System to control inflation and reduce Ship Maintenance Businesses post-harvest product damage up to 30%

Source: Coordinating Ministry for Economic Affairs 11 Progress of the Economic Policy Packages*

TOTAL INITIAL Initially, there are 233 regulations which need to be REGULATIONS 233 I–I–XXIVI deregulated

REVOKED Based on the further assessment, 11 regulations has been REGULATIONS 11 I–I–XXIVI revoked from deregulation process

TOTAL Total regulation subject to be deregulated: 222 REGULATIONS 222 I–I–XXIVI regulations

SET 219 99% As of May 15 th, 2018, deregulation of 219 regulations are PRESIDENTIAL LEVEL 52 PRESIDENTIAL finished (99%), comprising 50 regulations at Presidential 47 TOTAL 42 50 FINISHED 96% SELESAI level and 169 regulations at Ministerial/Institutional level

MINISTERIAL/INSTITUTIONAL LEVEL 170 TOTAL 169 FINISHED 99%

ON GOING Unfinished regulations: Proposed Policy on Development DISCUSSION 3 1% of Business and competitiveness of National Logistics Service Providers

*as of May 15, 2018

Source: Coordinating Ministry for Economic Affairs 12 Other Progress on Economic Policy Packages

Fair, Simplified & Development of Projectable Wage System Spesial Economic Zone (SEZ)

29 Provinces have set 2016 Minimum Wage Investment commitments in SEZ up to System in accordance to the Government 2017 reach 41 T, with 3 hour licenses Regulation (GR) No. 78/2015 already applied in 4 SEZ’s Administrators in 2017

Industrial Zone Deregulation on Logistics Sector

52 Bonded Logistic Center has been • The Provinces of Central Java proposed 3 launched to support various industries IZ’s: Kendal, Demak, and Ungaran • Pharmaceutical IZ in Bitung (North Sulawesi) in 2017

13 Investment Incentives to Boost Industry Sector

BUSINESS EXPANSION INDUSTRIAL ZONE

• Tax allowance • Exemption or relief of import duty on capital goods, machinery or • VAT exemption on import or delivery of capital goods, equipment for production purposes that can not be produced • Import Duty exemption on machineries/goods/materials, domestically; • Tax Allowance and Tax Holiday • Exemption or relief of import duty on raw materials or auxiliary material for production purposes for a certain period of time and certain conditions; • Exemption or suspension of VAT on the import of capital goods FREE TRADE ZONES AND PORTS or machinery or equipment for production purposes that have not been produced domestically for a certain period of time; Exemption of: • Accelerate depreciation or amortization (part of tax allowance); • Import Duty and • VAT • Property tax relief, especially for certain business sectors in • Luxury Goods Sales Tax (PPnBM) certain regions; • Customs duty • Combine with Online Single Submission (OSS)

PIONEER INDUSTRIES MICRO, SMALL, MEDIUM ENTERPRISES (MSMES)

Tax holiday of corporate income tax in a certain amount and time Decreasing MSMEs Tax from 1% to 0.5% of gross revenue

SPECIAL ECONOMIC ZONE E-COMMERCE

• No collection of VAT and Luxury Goods Sales Tax (PPnBM), • Sales from customs areas for non-small entrepreneurs through • Customs tax exemption, the market place will be subject to 0.5% income tax and 1% • Tax Allowance and Tax Holiday, VAT • Suspension of Import Duty, • Sales from customs areas for small entrepreneurs through the • 0% Import Duty for goods produced using local components of market place will be subject to 0.5% income tax a certain level

Source: Coordinating Ministry for Economic Affairs 14 New Tax Holiday Policy* to boost industry sector

PROVISION BEFORE AFTER

Pioneer Industry with minimum investment value of Pioneer Industry with minimum investment value of 500bn 1 trillion Rupiah (minimum investment value of Rupiah 500bn Rupiah for telecommunication sector) Applied to 17 industry groups: Applied to 8 industry groups: (i) upstream base metal; (ii) oil and gas refinery; (iii) (i) upstream basic metal industry; (ii) oil and gas petrochemical (oil, gas, or coal based); (iv) non-organic base refinery industry; (iii) organic basic chemicals industry; chemical; (v) organic base chemical; (vi) pharmaceutical materials; (vii) semiconductor and other components; (viii) communication Taxpayer (iv) machinery industry; (v) plantation, forest, and fishery products processing industry; (vi) devices components; (ix) medical devices components; (x) telecommunication, information and communication machine manufacturing for industry; (xi) machine main industry; (vii) marine transportation; and (viii) components manufacturing; (xii) robotic components economic infrastructure manufacturing; (xiii) ship components manufacturing; (xiv) airplane components manufacturing; (xv) train components manufacturing; (xvi) power plants; and (xvii) economic infrastructure

10 – 100% 100% (single rate) Corporate Income Tax (CIT) reduction rate 5 – 20 years depends on the investment value (in IDR): • 5 – 15 years; or • Can be extended to 20 years; subject to MoF 1. 500Bn – 1Tn : 5 years 4. 15Tn – 30Tn : 15 years Concession period discretion 2. 1Tn – 5Tn : 7 years 5. ≥ 5Tn : 20 years 3. 5Tn – 15Tn : 10 years

Not available 50% CIT reduction for the next 2 years Transition

Tax allowance not provided Tax allowance for business expansion can be provided with terms and conditions applied After Tax Holiday

Source: Coordinating Ministry for Economic Affairs *) MoF has issued a new Tax Holiday policy through Regulation No. 35/PMK.010/2018 (PMK-35) dated 4 April 2018. 15 Enhancing Business License Service Standard Presidential Regulation to Accelerate Ease of Doing Business has been launched

Improve efficient, streamlined, Provide business licensing Overcome the barriers & integrated business license process assurance in terms to doing business in service standards of the costs and lead times Indonesia 2 4 6 1 3 5

Policy GoalsPolicy Accelerate the Increase coordination & Implement integrated business licensing synergy between central & licensing process process regional government (single submission)

1st Phase 2nd Phase

Forming a Task Force to Business license identify & overcome the end- regulatory reforms to-end licensing barriers

Implementing a licensing checklist Implementation of the for Special Economic Zones (KEK), Single Submission Free Trade Zones (FTZ), Industrial system Zones & Tourist Zones Main PolicyMain

Utilizing data sharing Note: 1st and 2nd Phase are implemented in parallel

Source: Coordinating Ministry for Economic Affairs 16 Improving Investment Climate Online Single Submission (OSS) Has Been Launched...

OSS is a web-based business licensing system intended to cut the red tape involved in obtaining business permits and integrated between the central government and regional administrations

Sectors

Environment Public Works Lorem Ipsum Electricity Industry & Forestry & Housing HealthSuitable Sector for all Sector Sector Sector Sector category,

Information & Marine & Medicine & Transportation Trade Sector Fishery Sector Food Sector Sector Communication Sector

Other Sector

The Advantage of Using OSS

Business licenses Standardized Ellectronically can be secured in business licenses integrated under an hour are available

Accessible at The whole licensing More practical anytime and process is monitored anywhere by the Task Force

Source: Coordinating Ministry for Economic Affairs 17 Improving Investment Climate …Bonded Logistic Center to Improve Indonesia’s Competitiveness

Bonded Logistic Center To date, 52 Bonded Logistic Center has been launched to support various industries. (Pusat Logistik Berikat/PLB) is a facility provided by Ministry of Finance as part of the Food & Small and implementation of the beverages medium 1st Economic Policy Package. industry industry Oil and Personal PLB facility aims to improve gas, and care/ efficiency and reduce the cost of mining home care industry industry Synthetic transportation and logistics in textile Auto- (chemical Indonesia; support the growth of motive substances) the domestic industry, including industry Textile industry. Heavy small and medium (cotton) Equipment industry industries; increase industry investment; and to make Aircraft Indonesia to become a logistics Defence MRO industry industry hub in Asia Pacific.

18 Improving Investment Climate …revising the Negative Investment List

Introduction of New Foreign Ownership Regulation for Strategic Sectors

Cold storage Sports Center, Restaurants, Bars Pharmaceutical Raw Materials Film Processing Lab, Crumb Rubber Manufacturing Before After Before After Before After Before After

100% 100% 100% 100% 33% 49% 51% 85%

Toll Road Operator, Distribution, Warehousing Private Museum, Catering, apparel Key Reforms in Negative Foreign Telecommunication Testing Company Manufacturing, Exhibitions & Investment List Conventions Before After Before After Before After Revision of "Partnership" category to refer to partnership with Micro, Small and Medium Enterprises 100% (MSMEs) 95% 33% 67% 51% 67%

Grandfather Law: If a particular sector is tightened in future, existing Professional Training, Golf Course foreign investor does not need to Telecommunication Provider Management, Air Transport Support Services, Consultancy for Construction1 with Integrated Services comply with tighter stake Travel Bureau Before After Before After Before After

Strengthen implementation of negative investment law through active roles from ministries, agencies 49% 67% 55% 67% 67% and regional governments 65%

1 For total project value of IDR10bn and above

Source: Investment Coordinating Board (BKPM) 19 Continuous Improvement of Investment Climate …another leap on Indonesia’s Rank on Ease of Doing Business (EODB)*

EODB 2018 EODB 2017 Change in EODB 2018 EODB 2017 Change in Rank Rank Rank Points Points Points

Overall 72 91 19 66.47 61.52 4.95

Starting a business 144 151 7 77.93 76.43 1.5

Dealing with Construction Permit 108 116 8 66.08 65.73 0.35

Getting Electricity 38 49 11 83.87 80.92 2.95

Registering Property 106 118 12 59.01 55.72 3.29

Getting Credit 55 62 7 65.00 60.00 5.00

Protecting Minority Investors 43 70 33 63.33 56.67 6.66

Paying Taxes 114 104 10 68.04 69.25 1.21

Trading Across Borders 112 108 4 66.59 65.87 0.72

Enforcing Contracts 145 166 21 47.23 38.15 9.08

Resolving Insolvency 38 76 38 67.61 46.46 21.15

* Higher rank is better, EoDB 2018 was published in October 2017 - Government efforts to boost business growth through deregulations and de-bureaucratization have been recognized by the improvement of EODB - Structural reforms will continue including in the budget and real sectors

Source: World Bank 20 Investment Realization (Q3-2018)

Direct Investments FDI Realization by Sectors (yoy) IDR tn 200 FDI DDI TOTAL 180 173.8 160 Non Metallic 140 Mineral Industry 120 US$76.0 mn 100 80 Transportation, 64.2% 60 Warehouse, and Housing, Industrial Estate, 40 89.1 Telecommunication 20 and Office Building 0 US$1,050.0 mn US$671.7 mn Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 130.7% 22.0%

2013 2014 2015 2016 2017 2018 Trade & Reparation Textile Industry Rp15IDR9.4176.6tnT IDR173.8tn US$76.6 mn Investment US$99.0 mn 375,982 434,463 Rp145.4 T 82.0% Realization 66.9% Decreasing* -1.6% 9.6% 15.6% Electricity Food Industry Q3-2017 Q3-2018 US$1,220.1 mn US$385.7 mn Q1-2016 Q1-2017 Q1-2016Q1-2017 * person 23.3% IDR84.7tn 35.9% IDR111.7tn IDR64.9tn Mining IDR89.1tn US$595.2 mn Decreasing -20.2% 30.5% 42.5%

Q3-2017 Q3-2018 Q3-2017 Q3-2018

Source: Investment Coordinating Board (BKPM), compared to Q3-2017 period 21 Section 2 Economic Factor: Strong and Stable Growth Prospects Remain Intact Conducive Environment Underpinning Strong Growth Fundamentals

Tax base to be 4th Most Budget reform as broadened from Largest Economy Populous country a part of larger one reduce in South East in the World; economic reform dependency on Asia 64% in initiative commodities productive age Large and Consistent Fuel subsidies Rising Middle Stable Budget Reform significantly Manageable Class and Economy reduced and Prudent debt Inflation Rate Affluent spending redirected management Customers to more productive allocation Reform-Oriented Administration

From commodity-based to manufacturing Three main sources of financing for and service sectors via infrastructure investment needs: State and regional development budget, State Owned Enterprises and PPP New High Continuing from 2015 policy, infrastructure From consumption-led to investment-led Economic Infrastructure will be higher than fuel subsidy growth via a stronger manufacturing sector and more investment initiatives Structure Investments Infrastructure spending focused on basic infrastructure projects Policies to maintain purchasing power to stimulate domestic economy in the midst of weakening macroeconomic conditions Fiscal and non-fiscal incentives to attract infrastructure investment and promote PPP

23 Indonesia’s Strong GDP

Strong GDP Growth1 • National economic growth momentum has continued to build in Indonesia, as confirmed by solid GDP growth figures for the second % QoQ YoY quarter of 2018, reaching 5.27% (yoy), the highest rate on record 7.0 since 2013. 5.12 5.05 5.17 5.18 5.01 5.06 5.19 5.06 5.27 4.94 4.93 4.82 4.74 4.77 4.92 4.94 5.01 5.01 5.0 • In terms of expenditure, private consumption by households and non- 3.83 3.74 4.01 profit institutions serving households (NPISH) recorded strong growth. 3.27 3.31 3.14 3.0 Household consumption stood at 5.14% (yoy), the highest since 2014. 4.01 4.21 On the other hand, NPISH consumption grew 8.71% (yoy) in the three 3.19 1.0 0.04 months to June 2018. • BI projects solid economic growth in 2018 on resilient domestic (0.16) (0.36) (1.81)(0.30) (1.70)(0.42) -1.0 demand. Solid investment is also expected in line with ongoing (1.73) (2.07) infrastructure development, thus driving private consumption gains. In -3.0 addition, expansive government consumption and maintained Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 macroeconomic stability will continue to bolster economic momentum. 2014 2015 2016 2017 2018 Moreover, efforts to strengthen the sectoral structure of the economy will be continued through structural reform policy, which will further Favourable GDP Growth Compared to Peers2 help to accelerate the national economy moving forward.

% Growth Prospect 9.0 8.0 Institutions 2018 GDP growth (%YoY) 7.0 6.0 5.1 5.3 2018 Budget 5.4 5.0 Bank Indonesia 5.0 – 5.4 4.0 3.0 IMF 5.3 2.0 World Bank 5.3 1.0 0.0 ADB 5.3 2012 2013 2014 2015 2016 2017 2018* Consensus Forecast 5.2 Indonesia India Philippines Bulgaria Colombia (October 2018)

1. Source: Central Bureau of Statistics of Indonesia (BPS), ** Including non-profit household consumption 2. Source: World Economic Outlook Database – April 2018; * indicates estimated figure 24 GDP Growth Breakdown

GDP Growth Based on Expenditures (%, YoY)1

2014 2015 2016 2017 2018 By expenditure Q1 Q2 Q3 Q4 Tot. Q1 Q2 Q3 Q4 Tot. Q1 Q2 Q3 Q4 Tot. Q1 Q2 Q3 Q4 Tot Q1 Q2 HH. Consumption 5.2 5.2 5.1 5.1 5.1 5.0 5.0 5.0 4.9 5.0 5.0 5.1 5.0 5.0 5.0 4.9 4.9 4.9 5.0 4.9 4.9 5.1 Non profit HH. 23.2 22.4 5.8 (0.5) 12.2 (8.1) (8.0) 6.6 8.3 (0.6) 6.4 6.7 6.7 6.7 6.6 8.1 8.5 6.0 5.2 6.9 8.1 8.7 consumption Government 6.1 (1.8) 1.2 0.9 1.2 2.9 2.6 7.1 7.1 5.3 3.4 6.2 (3.0) (4.0) (0.1) 2.7 (1.9) 3.5 3.8 2.1 2.7 5.3 consumption

Gross Fixed Cap. 5.4 4.0 4.4 4.1 4.4 4.6 4.0 4.9 6.4 5.0 4.7 4.2 4.2 4.8 4.5 4.8 5.3 7.1 7.3 6.2 7.9 5.9 Formation Exports 3.1 1.5 4.9 (4.4) 1.1 (0.6) (0.3) (1.0) (6.4) (2.1) (3.1) (1.5) (5.8) 4.1 (1.6) 8.4 2.8 17.0 8.5 9.1 6.1 7.7 Imports 5.1 0.4 0.2 3.0 2.1 (2.6) (7.1) (6.5) (8.6) (6.2) (5.0) (3.5) (4.1) 2.7 (2.4) 4.8 0.2 15.5 11.8 8.1 12.7 15.2 GDP 5.1 4.9 4.9 5.0 5.0 4.8 4.7 4.8 5.2 4.9 4.9 5.2 5.0 4.9 5.0 5.0 5.0 5.1 5.2 5.1 5.1 5.3 1. Source: Central Bureau of Statistics of Indonesia (BPS), ** Including non-profit household consumption

GDP Growth by Sector (%, YoY)

2014 2015 2016 2017 2018 By sectors Q1 Q2 Q3 Q4 Tot. Q1 Q2 Q3 Q4 Tot. Q1 Q2 Q3 Q4 Tot. Q1 Q2 Q3 Q4 Tot. Q1 Q2 Agriculture, forestry, and 5.2 4.9 3.6 3.3 4.2 3.7 6.5 2.9 1.6 3.8 1.5 3.5 3.2 5.5 3.4 7.1 3.2 2.8 2.2 3.8 3.3 4.8 fishery Mining and Quarrying -1.2 0.7 0.7 1.5 0.4 0.6 (3.6) (4.4) (6.0) (3.4) 1.2 1.0 0.2 1.4 0.9 (1.2) 2.1 1.8 0.1 0.7 0.7 2.2 Manufacturing 4.5 4.9 5.0 4.2 4.6 4.1 4.2 4.6 4.4 4.3 4.7 4.6 4.5 3.3 4.3 4.3 3.5 4.8 4.5 4.3 4.6 4.0 Construction 7.2 6.5 6.5 7.7 7.0 6.0 5.4 6.8 7.1 6.4 6.8 5.1 5.0 4.2 5.2 6.0 6.9 7.0 7.2 6.8 7.4 5.7 Wholesale and Retail Trade, Repair of Car and 6.1 5.1 5.2 4.4 5.2 3.8 1.6 1.4 3.5 2.5 4.3 4.3 3.7 3.9 4.0 4.6 3.5 5.2 4.5 4.4 4.9 5.2 Motorcycle Transportation and Storage 7.0 7.6 7.7 7.2 7.4 6.3 6.0 7.0 7.5 6.7 7.4 6.5 8.2 7.6 7.4 8.1 8.8 8.9 8.2 8.5 8.6 8.6 Information and 9.9 10.7 9.8 10.1 10.1 9.7 9.3 10.6 9.2 9.7 7.6 9.3 8.9 9.6 8.9 10.5 11.1 8.8 9.0 9.8 8.5 6.1 communication Financial service 3.6 5.5 1.9 7.9 4.7 8.6 2.6 10.3 12.8 8.6 9.3 13.6 9.0 4.2 8.9 6.0 5.9 6.2 3.8 5.5 4.3 3.0 Other Services* 5.4 4.7 5.9 6.5 5.7 5.1 6.5 4.8 5.5 5.4 6.0 5.6 4.5 3.8 4.9 4.1 3.5 4.8 6.1 4,7 5.5 6.2 GDP 5.1 4.9 4.9 5.0 5.0 4.8 4.7 4.8 5.2 4.9 4.9 5.2 5.0 4.9 5.0 5.0 5.0 5.1 5.2 5.1 5.1 5.3 Source: Central Bureau of Statistics of Indonesia (BPS) *Other services consist of 10 sectors (according to Standard National 2008) 25 Regional Growth Remains Positive Higher Growth Occurred In Most Of The Regions and Java Still Contributes Meaningfully

Source: Central Bureau of Statistics of Indonesia (BPS) 26 Section 3 External Factor: Improved External Resilience External Balance under Control Supported by Adequate Reserves

Balance of Payments Portrait Current Account Deficit within Safe Threshold

US$bn 2012: 2013: 2014: 2015: 2016: 2017: US$bn CA Deficit CA Deficit CA Deficit CA Deficit CA Deficit CA Deficit 20 Current Account Capital and Financial Account 160 (US$24.4bn) (US$29.1bn) (US$27.5bn) (US$17.5bn) (US$16.9bn) (US$17.3bn) US$bn Overall Balance Reserve Asset (RHS) 15 8 6 120 4 10 119.8 2 0.29 1.63 5 0 80 -2 0 -4 (8.16) (4.31) -6 -5 40 -8 (8.03) -10 -10 (8.03) (1.79) -12 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1* Q2* Q3* Q4*Q1**Q2** -15 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1*Q2*Q3*Q4*Q1**Q2** 2012 2013 2014 2015 2016 2017* 2018**

2012 2013 2014 2015 2016 2017* 2018** Goods Services Primary Income Secondary Income Current Account Source: Bank Indonesia Source: Bank Indonesia Trade Balance Deficit in line with Improving Economic Activities Substantial FX Reserves to Mitigate External Challenges

2013: 2014: 2015: 2016: 2017: US$bn Deficit Deficit Surplus Surplus Surplus FX Reserves as of September 2018: US$114.8 bn (US$4.10bn) (US$2.37bn) US$7.59bn US$8.83bn US$11.83bn (Equiv. to 6.3 months of imports + servicing of government debt) 3.00 US$bn Month 130 15 FX Reserves (LHS) Month of Import & Debt Service (RHS) 2.00 14 120 13 12 1.00 110 11 10 100 9 0.00 8 90 7 -1.00 80 6 5 70 4 -2.00 OG Non-OG Total 3 60 2 1 -3.00 50 - 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 2013 2014 2015 2016 2017 2018 2013 2014 2015 2016 2017 2018 * Preliminary Figure ** Very Preliminary Figure Source: Bank Indonesia Source: BPS 28 Exchange Rate In Line with Fundamentals

Movement of Rupiah IDR/US$ 15,450 *data as of October 22nd, 2018 15,185 The Rupiah is undergoing depreciation, albeit with contained volatility. 15,250 The depreciation of Rupiah is in line with currencies of peer 15,050 15,163 countries. On average, the Rupiah depreciated 2.07% during 14,850 September 2018, and continue to slightly depreciate in October 2018. 14,601 14,869 14,650 As of 22nd October 2018, the rupiah had depreciated by 10.65% (ytd), which is not as severe as that felt in Brazil, India, South Africa 14,450 14,561 14,250 14,043 14,058 and Turkey. Looking ahead, Bank Indonesia will continue to stabilize 14,409 the Rupiah exchange rate in line with the currency’s fundamental 14,050 13,952 13,760 IDR/USD value, while maintaining market mechanisms, supported by financial 13,850 13,603 market deepening. Such policy is focused on safeguarding the Rupiah 13,650 13,576 Monthly Average 13,809 volatility and sustaining adequate market liquidity, thus preventing 13,450 13,378 Quarterly Average risks to macroeconomic and financial system stability. 13,250 1-Jan 1-Feb 1-Mar 1-Apr 1-May 1-Jun 1-Jul 1-Aug 1-Sep 1-Oct Rupiah Exchange Rate Fared Relatively Well Compared to Peers Rupiah Exchange Rate Volatilty YTD 2018 vs 2017 % -33.00 60 TRY -23.03 -13.45 ZAR 2.19 Sep-18 Oct-18 -13.17 50 INR -3.81 BRL -10.73 -11.83 40.0 40.5 -10.65 38.4 39.3 IDR -5.35 40 -7.29 PHP -4.22 -6.34 27.9 CNY 3.16 30 -5.43 KRW 3.32 EUR -4.37 18.3 point-to-point average 5.11 20 SGD -3.11 12.2 2.76 12.2 10.2 10.0 -2.72 9.5 MYR 7.41 10 6.8 7.5 6.6 6.0 5.6 5.2 4.9 THB -0.59 3.7 2.1 *data as of October 22nd, 2018 5.33 JPY -0.16 2.04 % - -40.0 -35.0 -30.0 -25.0 -20.0 -15.0 -10.0 -5.0 0.0 5.0 10.0 TRY BRL ZAR INR IDR KRW THB SGD PHP MYR

Source: Bank Indonesia 29 Bank Indonesia’s Policy Direction To maintain Rupiah stability and support growth

Measures To Stabilize Rupiah Exchange Rate Measures To Support Growth

1 1 A pre-emptive, front- To stabilise the rupiah Further easing of loading and ahead-of- exchange rate, while macroprudential To bolster the growth of the the-curve policy consistently controlling inflation policy property sector which has positive response within the 2018-2019 target impact to the economy range of 3.5±1%

2 2 Dual intervention in Coordination with the Coordinating the foreign exchange To stabilise the rupiah Policy Ministry of Economic Affairs, the market and exchange rate, adjust fair coordination to Ministry of Finance, and the government securities prices in the financial markets accelerate Financial Services Authority to (Surat Berharga Negara and maintain adequate liquidity financial market accelerate financial market – SBN) market in a in the money market deepening deepening, particularly in private measured way financing for infrastructure.

3 3 Strengthening the Electronification to support social To maintain adequate liquidity Payment system monetary operations in assistance disbursement and in the rupiah money market development to the foreign exchange and financial transcation of the central and interbank swap market support digital money markets economy and regional government

Sharia economy and finance 4 Intensive communication, 4 To form rational expectations, Sharia economy development to create halal value especially to market thus helping to mitigate the and finance chain, sharia financal sector players, banks, rupiah overshooting its development development both for commercial businesses, and fundamental level. and social purposes, including its economists education and communication

Source: Bank Indonesia 30 Ample Lines of Defense Against External Shocks

Ample Reserves

 Ample level of FX reserves to buffer against external shock FX Reserve  FX Reserves as of September 2018: US$114.8 billion

Swap Arrangement

 US$22.76 billion swap line with Japan currently in place Japan  As of October 14th, 2018, the facility available in USD and JPY  The size of the swap line was increased from US$12 bn in December 2013

South Korea  Renewed a 3 year KRW/IDR swap arrangement with the size of up to 10.7 tn KRW/IDR115 tn in March 2017 Bilateral

Australia  Established a 3 year A$/IDR swap arrangement with the size of up to A$10 bn or IDR100 tn in Dec. 2015

ASEAN Swap  Entitled to a maximum swap amount of USD600 million under ASA Arrangement  The first MoU on the ASA was signed in 1977 among 5 ASEAN Central Banks with total facility USD100 million (ASA)  Doubled to USD2 billion in 2005

Chiang Mai  Entitled to a maximum swap amount of US$ 22.76 bn under the ASEAN+3 (Japan, China, and Korea) FX Initiative

Regional reserves pool created under the agreement Multilateralization  Came into effect in 2010 with a pool of US$120 bn (CMIM) Agreement  Doubled to US$240 bn effective July 2014

IMF Global  Indonesia is entitled to access IMF facilities for crisis prevention to address potential (actual) BOP problem Financial Safety  Such facilities include Flexible Credit Line (FCL) and Precautionary and Liquidity Line (PLL)

Global Net - GSFN

Source: Bank Indonesia 31 Solid Policy Coordination In Managing Financial Markets Volatility

The enactment of Law No. 9/2016 regarding Prevention and Mitigation of Financial System Crises as a legal foundation for the government to serves Gov’t Securities Crisis Management Protocol (CMP) at the time of financial crisis in the form of Financial  Indicators: System Stability Committee (KSSK) - Yield of benchmark series; - Exchange rate; - Jakarta Composite Index; KSSK members: the Ministry of Finance, Bank - Foreign ownership in government securities Indonesia, the Financial Services Authority, and the  Policies to address the crisis at every level : Deposit Insurance Corporation - Repurchase the government securities at secondary market - Postpone or stop the issuance

Bond Stabilization Framework Swap facility arrangements based on international cooperation First Line of Defense Buyback fund at DG of Budget State’s Budget Financing and Risk Management Investment fund at Public Service Enhancing coordination between government Agency (BLU) (min. level Aware) institutions and continuous dialogue with market State Owned Enterprises participants (BUMN)’s Budget Related SOEs (min. level Aware) Social Security Organizing Agency BPJS (min. level Aware) (BPJS)’s Budget CMP Implementing Crisis Management Protocol (CMP) Second Line of Defense State General Treasury Account (Rekening KUN) (min. level Alert) State’s Budget Accumulated cash surplus (SAL) (min. Level Crisis)

BSF Implementing Bond Stabilization Framework (BSF)

Source: Ministry of Finance 32 Strengthened Private External Debt Risk Management

Debt Burden Indicator (External Debt/GDP) Remains Comparable to Peers Rating Encouraging Corporates Compliance on Hedging Ratio & Liquidity Ratio

External Debt/GDP (%) Hedging Ratio* 295 ; 10.8% 185 ; 6.8% Bulgaria 64.7

Colombia 42.2

Indonesia 32.8

Philippines 21.6 ≤ 3 months > 3 - 6 months

India 22.4 2,432 ; 89.2% 2,542 ; 93.2% 0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0

2019F 2018F 2017 Source: Moody’s Statistical Handbook, May 2018 Liquidity Ratio* Regulation on Prudential Principle in Managing External Debt 350 ; 12.8% Phase 1 Phase 2 Phase 3 Regulation Key Points Jan 1,2015 – Jan 1,2016 – Jan 1, 2017 Dec 31,2015 Dec 31,2016 & beyond Object of Regulation Governs all Foreign Currency Debt Hedging Ratio < 3 months 20%* 25%** > 3 – 6 months 20%* 25%** 2,377 ; 87.2% Liquidity Ratio (< 3 months) 50% 70% Credit Rating Not applicable Minimum rating of BB- Must be done Hedging transaction to meet not necessarily be done with a Comply Not Comply with a bank in hedge ratio bank in Indonesia Indonesia

Sanction As of Q IV-2015 Applied *Data as of Q2 2018, with total population 2.727 corporates Source: Bank Indonesia Source: Bank Indonesia 33 Healthy External Debt Composition

External Debt Structure The Structure of External Debt is Dominated by Long-Term Debt

Private Debt Government and Central Bank Debt Short Term External Debt Long Term External Debt 100% 100% 90% 90% 80% 80% 46.4 44.2 45.9 52.6 50.0 49.5 51.2 51.2 50.7 51.4 51.3 50.7 50.4 50.4 50.3 70% 57.4 58.6 70% 60% 78.8 79.3 78.3 78.8 60% 81.7 79.8 82.1 82.9 84.5 83.8 84.0 84.0 84.2 84.1 84.9 84.3 84.4 50% 50% 40% 40% 30% 30% 53.6 55.8 54.1 47.4 50.0 50.5 48.8 48.8 49.3 48.6 48.7 49.3 49.6 49.6 49.7 20% 42.6 41.4 20% 10% 10% 21.2 20.7 21.7 21.2 18.3 20.2 17.9 17.1 15.5 16.2 16.0 16.0 15.8 15.9 15.1 15.7 15.6 0% 0%

External Debt Remains Manageable External Debt to GDP Ratio & Debt to Export Ratio

Million USD % External Debt to Export Ratio External Debt / GDP Ratio (rhs) 400,000 External Debt External Debt Growth (rhs) 20.0 % % 17.1 200 36.1 40 18.0 34.3 34.7 34.8 34.3 350,000 32.9 31.8 35 16.0 180 29.1 300,000 27.4 14.0 26.5 30 11.5 12.0 25.0 176.1 250,000 11.3 160 10.2 10.3 12.0 168.4 167.9 166.8 25 9.0 160.4 200,000 10.0 140 20 8.0 150,000 5.4 5.9 5.6 139.5 15 6.0 120 100,000 3.0 121.8 123.1 10 4.0 100 114.9 113.8 50,000 5 2.0 101.0 0 0.0 80 0

*Provisional Figures **Very Provisional Figures Source: Bank Indonesia, External Debt Statistics of Indonesia, October 2018 34 Manageable External Debt Profile Short term non-bank corporate debt (non affiliation) represents only 8.9% of total private external debt

Public Long Term 1 Private Bank

Affiliation US$181.3bn US$132.2bn US$19.0bn or or or 50.3% 73.7% 10.6% US$12.3bn of Total Ext. of Private Ext. of Private or Debt Debt Ext. Debt 6.8% External Debt of Private Position Ext. Debt

US$179.4bn US$47.2bn or US$28.2bn or or US$360.7bn 49.7% 26.3% 15,7% of total of Private of Private Ext. Debt Ext. Debt Ext. Debt

Private Non-Bank US$15.9bn 1 Short-Term or 8.9% Private of Private Ext. Debt External Debt Position as of August 2018 1 Based on remaining maturity Non Affiliation Source: External Debt Statistics of Indonesia, October 2018

35 Section 4 Fiscal Performance and Flexibility: More Fiscal Stimulus with Prudent Fiscal Policy Integrated Reform to Provide Higher Quality of Economic Growth Structural reforms to enhance potential growth and navigate through challenges

• Fair State Budget that declines poverty and income inequality

Fiscal

Synergy in reform to boost the more sustainable and inclusive Monetary & • Monetary policy to support • Efficient, competitive, and Real Sector growth Financial macroeconomic stability innovative real sectors Sector • Price stability and sustainable • Job-creation current account deficit • Trade and investment • Efficient and credible policies that support growth, financial sector efficiency, and stability

Source: Ministry of Finance 37 Growth Momentum is Expected to Continue Several key drivers and strategies to accelerate growth

Key Drivers Strategies to Encourage Growth

• Maintaining purchasing power, boosting domestic • Consumption remains robust among others demand and supporting business activity. supported by benign inflation  Improve distribution channels • Investment grows stably supported by  Increased shopping events, creative industries infrastructure acceleration, business climate and festivals in tourism areas improvement, rating upgrades, economic  Incentives for manufacture packages  Developing e-commerce industry • Export and Import keeps improving driven by increasing demand and improving prices • Encouraging private sector's role in investment  Strengthening and deepening financial • Support from several important events such as markets Asian Games, Regional Elections, and IMF-WB  Making a stable investment climate through annual meeting political stability

• Expand services sector, especially tourism  Increasing foreign tourists arrival through Risks & Challenges cooperation with other countries by increasing the direct flight schedule Global economic uncertainties: China economic rebalancing  Encouraging national creative industry growth and its financial vulnerability, advanced countries policy normalization, geopolitic, and climate change

38 2019 State Budget (APBN 2019) Healthier, More Equitable, Self-Sufficient

Healthier Macroeconomic • Deficit 1.84% of GDP, the Assumption Growth Inflation 3 months T-bills Exchange Rate lowest since 2013 5.3% 3.5% 5.3% 14.500/US$ • Towards positive primary balance • Debt to GDP ratio below ICP Oil Lifting Gas Lifting 30% of GDP 70/barrel 775 barrel/day 1.250 barrel/day

More equitable Development Unemployment Poverty Gini ratio HDI • Strengthening Target 4.8% – 5.2% 8.5 – 9.5 decentralization 0.38 – 0.39 71.98 (increasing fiscal transfer to regions) REVENUE EXPENDITURE • Strengthening scisl Rp2,165.1 T Rp2,461.1 T protection programs  Central Government • Focusing on human capital  Tax quality improvement Rp1,786.4 T Rp1,634.3T (inter-generational  Non Tax  Transfer to Region fairness) Rp378.3 T Rp756.8 T  Grant  Village Fund Self sufficient Rp0.4T Rp70.0 T • Increasing tax revenue • Increasing the share of local currency bond Deficit Primary Balance issuance Rp296.0 T (1.84% of GDP) (Rp20.1 T) • Domestic financial deepening Debt Financing Investment • Driving export Rp359.3 T Rp75.9T

Source: Ministry of Finance 39 More Credible and Realistic Budget …providing more certainty to all stakeholders

Macroeconomic Assumption for 2018 Budget • Credible and realistic 2018 budget, given that the 2016 and 2017 2017 2018 Indicator 2017 full year realization is relatively accurate with the R-Budget Realization Budget budget. Economic growth (%, yoy) 5.2 5.1 5.4 • 2017 realization is considerably accurate with the revised Inflation (%, yoy) 4.3 3.6 3.5 budget. This goes along with accurate macroeconomic 3-Month Treasury Bill (SPN) (%) 5.2 5.0 5.2 indicators relative to the budget. • The House of Representatives has approved the 2018 budget Exchange Rate (Average, IDR/USD) 13,400 13,384 13,400 with substantial increase in Revenues, mainly contributed by ICP (USD/barrel) 48 51.2 48 20.4% tax revenue increase compared to 2017 realization. Oil Production (thousand barrel/day) 815 804 800 • 2018 budget deficit is to be set at 2.19% of GDP, much Gas Production (millions of barrels/day) 1.15 1.14 1.20 lower compared to 2017 realization.

2016 2017 2018 Description (IDR Trillion) Audited Realization % Realization % difference Realization % Realization R-Budget Budget Realization (Audited) to R-Budget with R-Budget (a.o. Sept 30) to Budget A. Revenues and Grants 1,555.9 1,736.1 1,666.4 96.0 1,894.7 9.1 1,312.3 69.3 I. Domestic Revenue 1,546.9 1,733.0 1,654.8 95.5 1,893.5 9.3 1,305.9 69.0 1. Tax Revenue 1,285.0 1,472.7 1,343.5 91.2 1,618.1 9.9 1,024.5 56.1 2. Non Tax Revenue 262.0 260.2 311.2 119.6 275.4 5.8 281.4 102.2 II. Grants 9.0 3.1 11.6 374.2 1.2 -61.3 6.4 538.5 B. Expenditure 1,864.3 2,133.3 2,007.3 94.1 2,220.7 4.1 1,512.6 68.1 I. Central Government Expenditure 1,154.0 1,367.0 1,265.3 92.6 1,454.5 6.4 938.8 64.5 1. Ministerial Spending 684.2 798.6 765.1 95.8 847.4 6.1 511.5 60.4 2. Non Ministerial Spending 469.8 568.4 500.2 88.0 607.1 6.8 427.3 70.4 II. Transfer to Region and Village Fund 710.3 766.3 742.0 96.8 766.2 -0.0 573.8 74.9 C. Primary Balance -125.6 -178.0 -124.4 69.9 -87.3 -51.0 -2.4 2.7 D. Surplus (Deficit) -308.3 -397.2 -340.9 85.8 -325.9 -18.0 -200.2 % of GDP -2.49 -2.92 -2.51 -2.19 -1.35 E. Financing 334.5 397.2 366.6 92.3 325.9 -18.0 292.8 89.8

Source: Ministry of Finance

40 Commitment to Continue Strengthening Productive Spending Allocating budget to a more productive spending

Central Government Spending Line Ministries Rp.847,4 T • Improving planning with performance 2016 based, and integrated with development priority 2015 Rp1,154.0 T • Operational spending efficiency • Monitoring and evaluation Rp1,183.3 T • Early procurement process 2018 Non Line Ministries Rp1,454.5 T Rp.607,1 T 2017 Rp1,259.6 T

Energy Subsidy Non Energy Subsidy Interest payment

Subsidy as % of Total Spending Better targeting Integration with Cost efficiency 4.00 energy subsidy 3.35 3.35 • Subsidy for the • Controlling 3.50 Energy Non-Energy poorest family and • Synergy with cost of 3.00 there is no plan to social assistance financing eliminate the subsidy, programs and 2.50 • Deepening rather making it well- transfer to regions 2.00 government targeted. • Staple good price 1.50 bond market

% Spending% • Targeted for the poor. management 1.03 0.86 • Controlling 1.00 0.67 0.64 Electricity subsidy is • Improving debt burden 0.50 targeted to the agriculture 0.49 0.49 0.58 0.54 0.59 0.42 subscribers of 450 VA - productivity and 900 VA 2013 2014 2015 2016 2017 2018 • Database improvement • Inflation management

Source: Ministry of Finance 41 Increasing Tax Revenue Over The Years Future policies will be directed at expanding the tax base and increasing compliance

Tax Revenue (in IDR trillion) Tax Improvement Efforts

Tax revenue increased by 20.4% in 2018 compared to 2017 Automatic Exchange of Information (AEoI) • Expanding tax base Ratio to GDP (%) - RHSa • Prevent tax evasion (Base Erosion 1800 15% Profit Shifting) 13.1% 1600 11.6% 11.6% 13% 10.9% Data and Information System of Tax 1400 10.7% 11% Up to date and integrated (e-filing, 1200 e-form and e-faktur). 9% 1000 7% 800 Tax Compliance

1,618.1 5%

600 Sustainable compliance though e-

1,343.6 1,285.0 1,240.4 service, mobile tax unit, Small/Micro 400 1,146.9 3% Tax Office, and outbound call. 200 1% 0 -1% Tax incentive 2014 2015 2016 2017 2018 Budget • Tax holiday and tax allowance • Review on tax exemption Oil &Gas Income 38.1 In Trillion Rupiah Tax Revenue 1,424.0 Non-Oil & Gas Human Resource and 2018 Allocation: 1,618.1 Income Regulation Customs and Excise 1,385.9 Improving services and 2017 Realization: 1,343.6 organization effectivity 194.1

aTax ratio derived from tax revenue + revenue from natural resources/GDP Source: Ministry of Finance 42 Non-Tax Revenue Efficiency and Effectiveness on Natural Resources Management and Public Service Improvement

Non-Tax Revenue (in IDR trillion) Improving Regulation Ratio of non-tax revenue to Total Yearly Growth • Revise Non-Tax Revenue Law and 450 30% 25.7% Revenue Government Regulation on Non-Tax types 400 25% and tariff. 350 398.6 18.4% 14.5% 300 17.0% 16.8% 20% 311.9 250 Improving Monitoring on Management 262.0 275.4 15% 200 255.6 • Deposit revenue as its record 150 10% 100 • Collection of Accounts Receivable 5% 50 • Follow up the audit results 0 0% 2014 2015 2016 2017 2018 Budget Non-Tax Revenue Optimization • Improve efficiency and effectivity of natural Non-Tax Revenue 2018 Breakdown (in IDR resource administration trillion) In Trillion Rupiah • Improve SOEs performance 23.3 2018 Allocation: 275.4 • Improve efficiency of Non-Tax Revenue operation 2017 Realization: 311.9 83.8 43.3 • Revise contracts  cost recovery efficiency Non-Tax Revenue 2018 : 275.4 • Discover new potentials

Other Non-Tax Revenue Improving Public Services Oil and Gas Revenue • Transparency and easing State Asset Revenue 44.7 • IT Utilization Public Service Agencies Revenue • Improvement on non-tax revenue Non-Oil and Gas Revenue administration 80.3 Source: Ministry of Finance 43 Increasing Quality of Spending Reinforcing Allocation, Distribution, and Stabilization functions

(Rp Trilllion)

Poverty and Gap Infrastructure Priority Sector State Apparatus and Defense of Security Community Services & Democracy 283.71) 410.72) 34.83) 365.84) 220.85)

Social protection program Road Construction (PKH) Agriculture Improved Defense • Increased food bureaucratic 865 km The achievement 2018: 10,0 mio families Rp17,3 T production and reform for better 2017: 6,0 mio families Rp12,7 T of MEF phase 2 construction of quality of public and the Irrigation infrastructure services development of Construction facilities Expansion of Non-Cash Food • Development of defense industry 781 km horticulture Assistance (BPNT) Prosperity of 2018: 10,0 mio families Rp13,5 T the apparatus Security Electrification 2017: 1,4 mio families Rp1,6 T Tourism and pensioners Maintenance of Ratio • Development of 10 security, order, 95,15 % tourist destinations and criminal Health services PBI • Increased tourists Increase budget for investigation 2018: 92,4 mio people Rp25,5T • Tourism promotion 2017: 92,4 mio people Rp25,5T Building Flats the food allowance 13.405 unit of military / police foreces  Democracy Fishery Regional Rp5 mio from Education Smart Indonesia Program • Increased elections 2018, Rp55.000 tp 2018: 19,7 thousand students Rp10,8 T competitiveness of and Rp60.000/person/day 2017: 19,7 thousand students Rp10,7 T processed fishery preparations for Bidik Misi: 401,5 thousand students Rp4,1 T products national • Fishing boats 2017: 339,4 thousand students Rp3,5 T Improved system elections 2019 support 1048 units and retirement • Environmental benefits of state sustainability employee 1) Include Village Fund (Dana Desa) and subsidy (exclude tax subsidy) 2) Temporary number 3) Ministerial allocations; KKP and Ministry of Tourism 4) Including pensioners and local gov’t apparatus 5) Ministry of Defense allocation, National Police, Election Commission, and Election Supervisory Board Source: Ministry of Finance 44 Investments in Human Capital Has Been Ramped Up 20% of national budget is allocated for education and another 5% for health

Budget for Education Program Budget for Health Program

IDR tn IDR tn 500 125 444.1 111.0 450 419.8 104.9 390.1 370.4 400 353.4 100 92.3 350 300 75 65.9 59.7 250 200 50 150 100 25 50 0 0 2014 Real 2015 Real 2016 Real 2017 Outlook 2018 Budget 2014 Real 2015 Real 2016 Real 2017 Outlook 2018 Budget

Targets of Education Program in 2018 Targets of Health Program in 2018

Indonesia Smart Bidikmisi School Immunization Indonesia Healthy Provision of Health Program Scholarship Rehabilitation Program Facilities

Basic & complete 19.7 million students 401.5 thousand college 61.2 thousand rooms immunization for 92.5% of 92.4 million people 49 hospitals/health centers students 0-11 months old infants School Operational Drug and Food Family Plan Program Assistance (BOS) Teacher Allowance Certification (KB) • Non Civil Servants : 435.9 thousand teachers • Civil Servants : 257.2 thousand teachers • Local Civil Servants : 1.2 million teachers

56 million students 74 thousand certifications 1.8 million people

45 Improved Budget Allocation Towards Local Government …promoting better allocation of budget spending to local government

2018 Transfer to Regions and Village Funds (Budget) Transfer to Regions/Village Funds

Special Autonomy & D.I Yogyakarta - DIY (IDR21.1 tn) Village Fund (IDR60.0 tn) 2013 2014 2015 2016 2017 2018 IDRtn Audited Audited Audited Audited Realization Budget Special Autonomy & Fund for Reformulated to (1) DIY keeps increasing from year Give more weight on Transfer to to year the poor population. (2) Region 513.3 573.7 602.4 663.6 682.2 706.2 Improving inequality between villages Village Fund - - 20.8 46.7 59.8 60.0 3% 1% Total Regional Incentive Regional 513.3 573.7 623.2 710.3 766.3 766.2 Fund (IDR8.5 tn) 8% Transfer Incentive Fund allocation has been increased to enhance local • Indonesia continues its improvement of regional transfer, esp. government performance village fund, to spur growth throughout regions and public service delivery • Allocation for both Transfer to Region and Village Fund has 24% been increasing substantially

Special Transfer Fund • The increased allocation indicates the Government’s (IDR185.9 tn) 64% commitment to support development in regions Special Transfer Fund allocation is based on each • A minimum 25% of general transfer fund must be earmarked regions’ proposal General Transfer Fund (IDR490.7 tn) for public service infrastructure and national Minimum of 25% (IDR122.7 tn) priorities earmarked for public service facility development acceleration. It provides revenue sharing fund to promote equal opportunity for natural resource producers & high tax earners Source: Ministry of Finance 46 2017 Achievements of State Budget Value creation on various projects and country development

15.5% 101.7% 118.5% 7.4% 23.0% 27.8%

• Tax revenue growth vs. • Revenue of customs • Non-tax revenue over • Growth of realized • Capital expenditure • Growth of transfer 2016 (excluding Tax and excise over 2017 2017 revised Budget, a government spending growth vs. 2016, a to village vs. 2016, Amnesty and Asset revised Budget, a growth of 17.7% vs vs. 2016 92.8% over 2017 99.6% over 2017 Revaluation) 7.4% increase vs. 2016 revised Budget. revised Budget 2016

Local Government Achievements Central Government Milestones

Infrastructure: • 794 km road development Bridges: 3,749 m bridge • 9,072 m bridge development in development, 291 m • 3 airports completed maintenance, and • 618.3 km railways 2,916m improvement Classroom: 1,351 new Roads: 1,033 km in classrooms, 11,006 development, 1,503 km rehabilitation, 11,758 maintenance, 9,789 km rural library collection Education: improvement • Distributed Indonesian Smart Card to 19.8 million students Tuition: Reduced tuition • School Operational Benefit for 8.0 million costs for 46.6 million • Scholarship for 364.4 students students and 5.6 million kindergarten- Welfare: Increased welfare aged children and work ethics of 1.7 Medical: Improved million civil teachers in rural facilities in 347 Healthcare and Social Security: areas and compensated hospitals and 3,873 • Distribution of Indonesian Health Card to 41,000 teachers in special 92.1 million people clinics regions Rural: 107,9 village roads, 89,200 health clinics, 178,800 toilets, and 107,700 connected clean water and 25,903 Ha irrigated lands

Source: Ministry of Finance 47 Indonesia’s Tax Amnesty Program – A Success Story With more than 965,900 taxpayers participating in the program

Tax Amnesty Result (as of the end of March 31st, 2017)

Preliminary Repatriation Evidence Payment 3% SMEs 1% 2% Tax Arrears ​Offshore Companies Payment 147.1 12% 14% 1.7 Declaration 85.59 21% 18.8 1,036 594.99 Individual SMEs 18% 861.81 ​Onshore 3,323.36 3,698 Declaration 114.2 Individuals Redemption 76% 68% Money 85%

Revenue Asset Declared Composition of Participants IDR 134.8tn (~1.1% GDP) IDR 4,881tn (~39.4% of GDP) Based on Asset Declared

Redemption Money Assets Declared

39.3

1.10

0.62 0.58

%ofGDP %ofGDP 8.3 0.20 5.2 0.15 0.17 3.9 3.6 0.12 2.1 0.04 0.04 0.3

Germany Belgium Italy Chile Indonesia India South Spain Australia India Spain Chile Indonesia Italy South Australia (2004) (2004) (2009) (2015) (2016) (1997) Africa (2012) (2014) (1997) (2012) (2015) (2016) (2009) Africa (2014) (2003) (2003)

Source: Ministry of Finance 48 Financing Policy 2018: General Objective & Policy

To meet financing needs at efficient cost and tolerable risk

To support the General development of deep, active, and Policy liquid market

To enhance public accountability as part of transparent Government debt Cost control management and debt risk

Source: Ministry of Finance 49 2018 Financing Needs Fulfilled from Government Securities IDR 730.2 tn (92%) and Loan IDR63.1 tn (8%)

Domestic GS IDR591.0 tn Deficit Domestic Debt Rp325,9 T Debt IDR595.5 tn matures (75%) Rp394,1 T (include Rp10,1 T of Domestic Loan IDR4.5 tn Private Placement) Investment Financing Lending Financing Rp65,7T Rp6,7T Needs

IDR793.3 tn Foreign Other Denominated financing Bonds (Rp0,2T) (JPY, EUR, USD) IDR139.3 tn Government Guarantee Foreign Debt Obligation IDR197.8 tn Rp1,1T (25%) Foreign Loan (Program & Project) IDR58.5 tn

Source: Ministry of Finance 50 Indicative Financing Plan for 2018 Creating prudent and sustainable fiscal management

Government Securities to Meet State Budget Financing Domestic Bonds

Indicative Budget Target* Weekly auction: Instruments IDR tn USD bn Conventional securities 25x Budget Deficit (2.19%) 325.9 24.3 Islamic securities 24x Government Securities (Net) 407.2 30.4 Non-Auction Government Securities (Gross) 822.2 61.4 Retail bonds (ORI, Retail Sukuk, Online Savings Bond Retail, Savings Sukuk)

Private Placement Based on request Composition Target avg. tenor maturity for Government Securities (SBN) Issuance Domestic Bond 80-83% 7-8 years International Bond 17-20%

Issuance Targets for Government Debt Securities and Sukuk International Bonds (USD, Sukuk USD EUR, JPY-denominated)

 Avoid crowding out in domestic market

25.0% - 30.0%  Provide benchmarks for corporate bonds  Investor base diversification

Front Loading Issuance for 2018 Budget Financing

 Faster access to liquidity  Anticipate developments in global environment

70.0% - 75.0%

Government Debt Securities Government Sukuk

*exchange rate assumption in 2018 budget: IDR13,400/USD

Source: Ministry of Finance 51 Disciplined and Sophisticated Debt Portfolio Management

Stable Debt to GDP Ratio Over the Years Deficit Productivity**

US$ bn Government Debt / GDP (%)

6.8 6.8

5.5 5.5 5.3 5.3 350 30.5% 35.0% 5.1

29.4% 3.4

28.3% 2.7 2.1 2.1

27.4% 2.1 1.6 1.6

300 30.0% 1.2 24.9% 24.7% 55.1 55.1 250 25.0% 54.7

200 54.7 20.0%

(0.1) (0.4)

54.5 (0.6) (1.6)

58.6 (2.2)

(2.8) (2.9)

150 15.0% (3.3)

(3.7)

(4.8)

(5.3) (5.8)

239.8 240.7 (6.1)

100 207.0 10.0% (7.1) 174.7 136.3 155.2

50 5.0% UK

Italy

USA

India

Brazil Japan

0 0.0% Turkey

S Africa S

Thailand

Malaysia Australia 2013 2014 2015 2016 2017 2018 *) Indonesia

Bond Loan Debt/GDP Ratio (RHS) GDP Growh Fiscal Deficit (% GDP) Source: Ministry of Finance Source: MOF, World Economic Outlook

Weighted Average Debt Maturity of ~8.5 Years Well Diversified Across Different Currencies

9.8 % of Yearly Issuance 9.7 2% 1% 1% 100% 3% 3% 2% 3% 3% 3% 4% 4% 9.4 3% 8% 7% 6% 14% 12% 9% 9.1 80% 29% 29% 31% 30% 24% 29% 60% 8.6 8.5 40% 60% 56% 53% 57% 56% 58% 20%

0% 2013 2014 2015 2016 2017 Sep 2018 2012 2013 2014 2015 2016 2017 ATM (in years) IDR USD JPY EUR Others*** Source: Ministry of Finance Source: Ministry of Finance

*using GDP assumption IDR14,395.07 as mentioned in APBN Kita **GDP growth and fiscal deficit numbers are average of 2012-2016 (5 years), ***SDR, AUD, and other. 52 Well Balanced Maturity Profile With Strong Resilience Against External Shocks

Declining Interest Rate Risks Declining Exchange Rate Risks

Variable rate ratio [%] Refixing [%] FX Debt to GDP ratio (%) FX Debt to total debt ratio (%) 23.2 46.8 21.0 20.7 20.8 44.5 43.4 42.6 42.4 19.5 40.4 17.5 16.0 14.8 13.7 12.1 10.7 10.6

12.8 11.7 10.7 12.2 12.1 11.7

2013 2014 2015 2016 2017 Sep 2018 2013 2014 2015 2016 2017 Sep 2018

Debt Maturity Profile Upcoming Maturities (Next 5 Years) IDR tn 500 Other Currencies IDR Denominated in 1 year (%) in 3 year (%) in 5 year (%) 450 40.8 400 39.8 36.0

154 34.7 350 33.3 33.9 300 25.4 26.3 250 22.7

165 21.7 21.4

155

158 136 125 20.1

200

121

102 105

150 25

294 10.1 11.3 30 156 8.6

7 8.4 14

100 23 7.7 32

41 6.5

20

175

172

165

165

162

139

137

118

133

126

35 31

50 27

2

28

97

2

108

92

24

100

83

79

73

34

2

51

29

29

28

26

23

9

21

7 5 0 15 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2013 2014 2015 2016 2017 Sep 2018

Note: using GDP assumption IDR14,395.07 as mentioned in APBN Kita Source: Ministry of Finance 53 Holders of Tradable Central Government Securities More Balance Ownership In Terms of Holders and Tenors

Holders of Tradable Gov’t Domestic Debt Securities Foreign Ownership of Gov’t Domestic Debt Securities by Tenor

100%

32.5% 38.2% 36.0% 35.6% 38.1% 37.5% 39.8% 36.9% 80% 37.0% 44.5% 42.8% 44.7%

60%

33.8% 30.8% 36.2% 39.8% 37.8% 39.9% 36.8% 38.1% 38.2% 37.5% 37.6% 40% 32.5%

37.4% 35.6% 37.2% 32.0% 33.6%

20% 39.0% 17.8% 17.3% 33.7% 31.0% 12.9% 15.2% 21.0% 26.9% 23.9% 23.4% 22.5% 11.8% 5.4% 3.7% 5.1% 5.3% 1.1% 1.3% 4.6% 5.0% 4.7% 0% 5.2% 3.2% 3.5% Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Sep-18 Dec 13 Dec 14 Dec-15 Dec-16 Dec-17 28-Sep-18 0-1 ≥1-2 Foreign Holders Domestic Non-Banks Domestic Banks ≥2-5 ≥5-10 ≥10 %Foreign Ownership of Total Source: Ministry of Finance 54 Ownership of IDR Tradable Central Government Securities

(IDR tn)

Description Dec-14 Dec-15 Dec-16 Dec-17 September-18

Banks* 375.55 31.04% 350.07 23.95% 399.46 22.53% 491.61 23.41% 621.35 26.94%

Govt Institutions (Bank Indonesia**) 41.63 3.44% 148.91 10.19% 134.25 7.57% 141.83 6.75% 111.39 4.83%

Bank Indonesia (gross) 157.88 8.90% 179.84 8.56% 218.04 9.45%

GS used for Monetary Operation 23.63 1.33% 38.01 1.81% 106.65 4.62%

Non-Banks 792.78 65.52% 962.86 65.87% 1,239.57 69.90% 1,466.33 69.83% 1,573.90 68.23%

Mutual Funds 45.79 3.78% 61.60 4.21% 85.66 4.83% 104.00 4.95% 117.78 5.11% Insurance Company and Pension 193.90 16.03% 221.45 15.15% 325.52 18.36% 348.86 16.61% 407.13 17.65% Fund Foreign Holders 461.35 38.13% 558.52 38.21% 665.81 37.55% 836.15 39.82% 850.85 36.89%

Foreign Govt's & Central Banks 103.42 8.55% 110.32 7.55% 120.84 6.81% 146.88 6.99% 161.01 6.98%

Individual 30.41 2.51% 42.53 2.91% 57.75 3.26% 59.84 2.85% 64.32 2.79%

Others 60.51 5.00% 78.50 5.37% 104.84 5.91% 117.48 5.60% 133.81 5.80%

Total 1,209.96 100.00% 1,461.85 100.00% 1,773.28 100.00% 2,099.77 100.00% 2,306.64 100.00%

1) Non Resident consists of Private Bank, Fund/Asset Manager, Securities Company, Insurance Company and Pension Fund. 2) Others such as Securities Company, Corporation, and Foundation. *) Including the Government Securities used in monetary operation with Bank Indonesia. **) net, excluding Government Securities used in monetary operation with Banks.

Source: Ministry of Finance 55 Section 5 Monetary and Financial Factor: Credible Monetary Policy Track Record and Favourable Financial Sector Bank Indonesia’s Policy Mix 2018 To Maintain Macroeconomic and Financial System Stability

 Implementing Macro prudential  Consistent policy rate, Intermediation Ratio (RIM) accelerate reduction of lending rate  Implementing Macro prudential Liquidity Buffer (MLB)  Stabilize exchange rate 2 consistent with fundamentals 1 Macro-  Accelerate implementation of Monetary prudential reserve requirement averaging Policy Policy

 Electronification: Social program, e-payment for 3 Government  Financial technology Payment Coordination System  National Payment Gateway with other Policy (NPG) Authorities  Controlling inflation: TPIP, TPID  Structural reforms: Government 5 4  Financial deepening & stability: Financial Market KSSK (Financial System Stability Deepening  Developing market instruments for financing Committee), OJK (Financial infrastructure Services Authority)  Developing financial market infrastructures

Source: Bank Indonesia 57 Bank Indonesia Policy Mix: October 2018

The BI Board of Governors agreed on 22nd and 23rd October 2018 to hold the BI 7-Day Reverse Repo Rate at 5.75%, while also maintaining the Deposit Facility (DF) and Lending Facility (LF) rates at 5.00% and 6.50%, respectively.

Consistent with ongoing Constantly implements Always strengthens policy Monitors prevailing efforts to reduce the a monetary operations coordination with the economic current account deficit strategy oriented Government and other developments, such as within a manageable towards maintaining relevant authorities in the current account Holds the threshold, while adequate liquidity in order to maintain deficit, exchange rates, BI 7-Day maintaining the the Rupiah market and economic stability and financial system Reverse attractiveness of domestic foreign exchange reinforce external stability and inflation, Repo Rate financial markets, thereby market, while also resilience, including as follow-up measures at 5.75%. bolstering external effectively commencing stimulating exports and to maintain resilience in Indonesia the Domestic Non- lowering imports, which will macroeconomic and against a backdrop of Deliverable Forwards reduce the current account financial system persistently high global (DNDF) on 1st deficit to 2.5% of GDP stability. uncertainty. November 2018. projected in 2019.

Source: Bank Indonesia 58 Principles of Average Reserve Requirement Ratios Improvement

Effective Considerations for the Average Reserve Requirement Substance Old New Ratios Improvement Date a. Additional rupiah • Improvement in average reserve requirement is a average reserve Fixed RR: 5% Fixed RR: 4.5% 16th July follow up to the monetary policy operational requirement for Average RR: 1.5% Average RR: 2% 2018 framework reform implemented by Bank Indonesia conventional RR: 6.5% RR: 6.5% since 2016. commercial banks • Monetary policy operational framework reform b. Annulment of 16th July started in August 2016 as BI7DRR replaced BI Rate 2.5% (from 1.5% demand deposit 0% 2018 as policy rate. This was then strengthened in 1st RR) renumeration July 2017, by the implementation of the average reserve requirement in rupiah for conventional c. Implementation of commercial banks at 1.5% out of the total 6.5% of foreign exchange Fixed RR: 8% Fixed RR: 6% 1st GDP reserve requirement in Rupiah. The average reserve Average RR: 0% Average RR: 2% October reformulation is also backed by various efforts in requirement for RR: 8% RR: 8%* 2018 financial market deepening. conventional • The current improvement aims to elevate flexibility in commercial banks banking liquidity management, enhance banking d. Implementation of 1st intermediation function, and support efforts in Fixed RR: 5% Fixed RR: 3% average reserve October financial market deepening. This multiple targets will Average RR: 0% Average RR: 2% requirement for 2018 in turn improve the effectiveness of monetary policy RR: 5% RR: 5%* transmission in maintaining economic stability. Islamic banks

* Complemented by harmonisation feature to align with the average reserve requirement in rupiah feature for conventional commercial banks (e.g. Calculation period, lag period, and Maintenance period of 2 weeks)

Source: Bank Indonesia 59 Principles of Macroprudential Intermediation Ratio (MIR) and Macroprudential Liquidity Buffer (MLB)

Considerations for Macroprudential Instruments Macroprudential Intermediation Ratio (MIR) and Macroprudential Liquidity Buffer (MLB)

1 2 3 4

Striving to stimulate the bank The regulation is The policy is expected to This intermediation function and effective for stimulate the bank macroprudential liquidity management, Bank conventional intermediation function to the policy instrument is Indonesia issued Bank Indonesia commercial banks from real sector congruent with countercyclical and Regulation (PBI) No. 16th July 2018 and for sectoral capacity and the can be adjusted in 20/4/PBI/2018 and Board of sharia banks from 1st economic growth target in line with prevailing Governors Regulation (PADG) No. October 2018. compliance with prudential economic and 20/11/PADG/2018 concerning principles, while also financial dynamics. the Macroprudential overcoming the issue of Intermediation Ratio (MIR) and liquidity procyclicality. Macroprudential Liquidity Buffer (MLB) for Conventional Commercial Banks, Sharia Banks and Sharia Business Units.

Source: Bank Indonesia 60 Principles of Macroprudential Intermediation Ratio (MIR)

MIR Sharia (Sharia Banks and Sharia Regulation MIR (Conventional Commercial Bank) Business Units) 1 MIR Accounting Formula Credit + Owned Bond Financing + Owned Sharia Bond Deposit + Issued Bond Deposit + Issued Sharia Bond 2 Rate and Parameters  Ceiling 92%  Ceiling 92%  Floor 80%  Floor 80%  Minimum Capital Adequacy Requirement  Minimum Capital Adequacy Requirement 14% 14%  For Sharia business units, the Minimum Capital  Upper disincentive parameter 0.2 Adequacy Requirement is the same as that of the parent conventional commercial bank  Lower disincentive parameter 0.1  Upper disincentive parameter 0.2  Lower disincentive parameter 0.1 3 Scope of credit/financing  Credit: rupiah and foreign currency  Financing: rupiah and foreign currency and deposits to calculate  Deposits in rupiah and a foreign currency:  Deposits in rupiah and a foreign currency: (i) MIR / MIR Sharia (i) demand deposits, (ii) savings deposits; wadiah savings; and (ii) unrestricted investment and (iii) term deposits, excluding interbank funds, excluding interbank funds funds 4 Source of Data Monthly Commercial Bank Reports Monthly Sharia Bank Reports

5 Criteria for securities held  Corporate bonds and/or corporate sukuk Corporate bonds and/or corporate sukuk  Issued by a nonbank corporation and by a resident  Offered to the public through a public offering  Equivalent to investment grade rating affirmed by a rating agency  Administrated by an authorised securities institution 61 Principles of Macroprudential Intermediation Ratio (MIR)

Regulation MIR (Conventional Commercial Bank) MIR Sharia (Sharia Banks and Sharia Business Units) 6 Percentage of the 100% securities held 7 Criteria for securities  medium-term notes (MTN), floating rate notes  sharia-compliant medium-term notes (MTN) issued (FRN) and/or bonds other than subordinated and/or sukuk other than subordinated sukuk bonds  Issued by a nonbank corporation and by a resident  Offered to the public through a public offering  Equivalent to investment grade rating affirmed by a rating agency  Administrated by an authorised securities institution

8 Securities Reporting Offline delivery mechanism (email) 9 Scope of deposits to  Average daily total deposits in rupiah at all  Average daily total deposits in rupiah at all meet DD MIR /DD MIR branch offices in Indonesia branch offices and sharia business units in Sharia Indonesia  Including rupiah liabilities to a resident and non-resident third-party nonbank, consisting  Including rupiah liabilities to a resident and non- of: (i) demand deposits, (ii) savings deposits; resident third-party nonbank, consisting of: (i) (iii) term deposits, and (iv) other liabilities wadiah savings; (ii) unrestricted investment funds, and (iii) other liabilities 10 Relaxation of DD  Bank Indonesia may relax the provisions of the DD MIR/Sharia DD MIR based on credit/financing MIR/Sharia DD MIR disbursement and fund accumulation  The provisions may be relaxed based on a request from a conventional commercial bank, Sharia bank or Sharia business unit or a recommendation from the Financial Services Authority (OJK)  Conventional commercial banks, Sharia banks or Sharia business units that receive the relaxed policy are exempt from sanctions 62 Principles of Macroprudential Liquidity Buffer (MLB)

Regulation MLB (Conventional Commercial Bank) MLB Sharia (Sharia Banks) 1 Rate 4% of rupiah deposits (including Sharia Business Units 4% of rupiah deposits deposits) 2 Components  Securities denominated in rupiah held by a  Sharia-complaint securities denominated in conventional commercial bank that may be used rupiah held by an Sharia bank that may be for monetary operations (including SBI/SDBI/SBN); used for sharia-compliant monetary operations and (including SBIS/SBSN)  Sharia-complaint securities denominated in rupiah held by an Sharia business unit that may be used for sharia-compliant monetary operations (including SBIS/SBSN)

3 Calculation Formula Percentage of rupiah securities held by a conventional Percentage of sharia-compliant rupiah securities commercial bank to rupiah deposits held by an Sharia bank to rupiah deposits

4 Flexibility Under certain conditions, the securities used to meet Under certain conditions, the securities used to the MLB may be used for repo transactions to Bank meet the sharia MLB may be used for repo Indonesia for open market operations, totalling no transactions to Bank Indonesia for open market more than 2% of rupiah deposits operations, totalling no more than 2% of rupiah deposits 5 Sources of Data on  Monthly Commercial Bank Reports  Monthly Sharia Bank Reports Deposits  Rupiah deposits to calculate MLB are the average  Rupiah deposits to calculate sharia MLB are daily total deposits at all branches in Indonesia the average daily total deposits at all branches in Indonesia  Rupiah deposits include: (i) demand deposits, (ii) savings deposits; (iii) term deposits, and (iv) other  Rupiah deposits include: (i) wadiah savings; (ii) liabilities unrestricted investment funds, and (iii) other liabilities

63 Relaxing the Loan-to-Value (LTV) and Financing-to-Value (FTV) Ratios

The LTV/FTV relaxation is conducted while taking into account aspects of prudential and consumer protection

1. Increasing opportunities of first time buyers to fulfill their housing 2. Relaxing the amount of loan/financing facility through indent needs through housing loan, specifically by adjusting the LTV ratio mechanism to a maximum of 5 facilities without taking for property loan and the FTV ratio for property financing for the account of the orders 1st facility, 2nd facility, etc., making the largest LTV ratio for 3. Adjusting the arrangement of stages and amount of property property credit and FTV ratio for property financing as shown in the loan/financing disbursement of indent property: table below.

“-“= The LTV rate depends on each bank’s risk management

Source: Bank Indonesia 64 Relaxing the Loan-to-Value (LTV) and Financing-to-Value (FTV) Ratios

Prudential aspects of Relaxing the Loan-to-Value (LTV) and Financing-to-Value (FTV) Ratios

1. The requirements of the LTV ratio for property credit and FTV ratio for property financing are as follows: i. The net ratio of NPL to total credit or NPF to total financing must not exceed 5%; and ii. The gross ratio of property NPL to total property credit or property NPF to total financing must not exceed 5%.

2. Banks must make sure that there is no loan transfer to another borrower at the same bank or different bank for tenors of less than 1 year. The requirements are valid for banks that will disburse pre-order property loan/financing.

3. Banks are required to comply with prudential principles when disbursing loans.

4. Gradual loan liquidation is only allowed for developers that comply with bank’s risk management policy (e.g.the business feasibility of the developer). 5. Banks are required to ensure that transactions to disburse loans (including down payment) and gradual liquidation must be processed through the debitor and developer/seller’s bank account.

LTV / FTV Exemptions

Central government or local government loan / financing programs are exempt from this regulation.

Source: Bank Indonesia 65 Principles of Domestic Non Deliverable Forward (DNDF) Transaction

Purposes General Provisions

 Domestic Non-Deliverable Forward Transaction (DNDF Transaction) 1. To support the effort of Plain vanilla derivatif transaction of foreign exchange against rupiah in the form stabilizing the Rupiah exchange of forward transaction with fixing mechanism in the domestic market rate through the additional of alternative hedging instruments  Forward Transactions Forward Transactions are sell/purchase foreign currencies againts rupiah whereas the delivery of funds shall be performed in more than 2 days after the 2. To support the development and transaction date deepening of the domestic financial market  Fixing Mechanism Transaction settlement mechanism without full movement of funds by 3. To increase the confidence of calculating the difference between rate on the transaction date and reference exporters, importers, and rate in JISDOR on a specified future time agreed in the contract (fixing date) investors in conducting  Other Definitions economic and investment The definition of derivative transaction of foreign exchange againts rupiah, activities through the flexibility of Forward Transaction, Spot Transaction, Customers, Foreign Party is referring to hedging transactions against Bank Indonesia regulations regarding foreign exchange transaction againts Rupiah currency risk rupiah Source: Bank Indonesia 66 Principles of Domestic Non Deliverable Forward (DNDF) Transaction

Bank can perform DNDF Transactions as follows: 1. Must have Underlying Transactions:

Transaction between: Including all following activities : a. Trade of goods and services b. Investments, loans, capital, and other investements. c. Banks credit or financing in foreign currencies (specifically for transactions between bank and customers) Can only be Bank – Customer performed to Excluding following activities: hedge rupiah a. Bank Indonesia certificates; exchange rate b. Placement of funds with bank; risk. c. Unwithdrawn credit facilities; d. Documents of foreign currencies sales againts rupiah; e. Money transfer by fund transfer companies f. Intercompany loan g. Money changer activities. Bank – Foreign Party

2. Nominal of DNDF Transactions ≤ Nominal of Underlying Transactions

3. Tenor of DNDF Transactions ≤ Tenor of Underlying Transactions Bank – Bank

Source: Bank Indonesia 67 Principles of Domestic Non Deliverable Forward (DNDF) Transaction

Transaction Settlement • Use Fixing mechanism • Reference rate: JISDOR for USD/IDR and BI FX Transaction MidRate for non-USD/IDR • Settlement currency : IDR • Roll over and early termination are not allowed

Roll over and early termination for DNDF is prohibited However, unwind can be done by opening the reverse DNDF transactions

Cover Hedging Bank may conduct DNDF Transactions with Bank Overseas for cover hedging purpose. • Underlying Transactions: DNDF Transaction between Bank and Customer/Foreign • Purpose: Hedging

Customer / Overseas Bank Cover Foreign Party Hedging Hedging Bank

Notes: Customer A conduct DNDF transactions with Bank B, and so Bank B can conduct DNDF transactions with overseas Bank for the purpose of cover hedge. Source: Bank Indonesia 68 Bank Indonesia Policy Mix: 2015 – 2017

2015 2016 2017

1. Monetary Policy • BI Rate cut of 25bps (Feb) . Policy Rate cuts of 150bps • BI 7-day RR Rate cut of . Moving from BI Rate (12 25bps to 4.50% (Aug) month) to BI 7-day Reverse • Further BI 7-day RR Rate Policy Rate Repo Rate (Aug) cut of 25 bps to 4.25% (Sept)

Reserve • Lowering RR by 50bps to • Further lowering RR by • Implementation of RR Requirement 7.5% (Nov) 100bps to 6.5% (Feb) Averaging (Aug): RR fixed 5%; RR Averaging 1.5%

2. Exchange Rate . Market-based exchange rate stability consistent with fundamental Policy . Dual intervention in the FX market and purchases of government bonds from secondary market in time of distress (capital reversal) or large mis-alignment

• Relaxation of LTV for . Further relaxation of LTV for . Initiative to issue property loans (Sept) 3. Macroprudential property and automotive macroprudential regulation . Strengthening systemic Policy loans (June) on Financing to Funding surveillance & Crisis Ratio (FFR) Management Protocol (April)

. Obligation to use IDR in . E-money for social transfer . National Payment Gateway 4. Payment domestic transaction (Nov) (June) System Policy (March) . Financial Technology . Modernized cash . Non-cash movement (FinTech) Office (Nov) management underway (GNNT) . New Rupiah issuance (Dec)

Source: Bank Indonesia 69 Stable Monetary Environment Despite Challenges

Well Maintained Inflation Ensured Price Stability Strengthened Monetary Policy Framework

(%) (%) 19 August 2016 CPI (%, yoy) Core (%, yoy) Volatile Food (%, yoy) Administered (%, yoy) 8.00 18 The New LF Rate: 7.00 Monetary Operation 7.00 Framework LF Rate: 6.25 13 BI Rate: 6.50 6.00 BI 7Day RR Rate: 5.50

8 DF Rate: 4.75 5.00 3.75 2.88 3 2.82 4.00 2.40

-2 3.00 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 2013 2014 2015 2016 2017 2018

Rupiah Exchange Rate Remains Comparable to Peers Pick Up in Credit Growth YTD 2018 vs 2017 %,yoy -33.00 20 TRY -23.03 Total Growth Working Capital Loans -13.45 18 ZAR 2.19 Investment Loans Consumption Loans -13.17 INR -3.81 16 -10.73 BRL -11.83 14 12.9 IDR -10.65 12.1 -5.35 12 PHP -7.29 11.4 -4.22 11.4 -6.34 10 CNY 3.16 -5.43 KRW 3.32 8 EUR -4.37 point-to-point average 5.11 6 SGD -3.11 2.76 4 -2.72 MYR 7.41 2 THB -0.59 *data as of October 22nd, 2018 5.33 JPY -0.16 0 2.04 % 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 -40.0 -35.0 -30.0 -25.0 -20.0 -15.0 -10.0 -5.0 0.0 5.0 10.0 2015 2016 2017 2018 Source: Bank Indonesia 70 5 Measures to Control Inflation

On January 22nd, 2018 the National Inflation Control Coordination Center has agreed on five strategic measures to control inflation in 2018 within the target corridor of 3.5±1%, while also setting the inflation targets at 3.5±1% for 2019 and 3±1% for 2020 and 2021.

Strengthening coordination between central and regional governments as well as Bank Indonesia

Dampening the second-round Strengthening quality effect of aministered price control of government adjusments policies.

3 Maintaining volatile food (VF) inflation 2 4 at 4-5% Strengthening the Bank Indonesia policy mix to 1. Ensuring food production maintain macroeconomic 2. Strengthening the government’s food 1 5 stability stock 3. Improving production management through corporate/cooperative farming 4. Improving rice miling yield & rice quality 5. Distributing subsidised rice for low- income households & non cash food assistance in time 6. Developing an accurate database on rice production 7. Synergizing between farmers & Source: Bank Indonesia downstream industries 71 4 Strategies to Achieve the Inflation Target

2018-2019 Target 2020-2021 Target

Achieving inflation at 3,5%±1% Achieving inflation at 3,0%±1% • Maintaining core inflation • Maintaining core inflation • Maintaining volatile food stability at 4-5% • Maintaining volatile food inflation less than 4% • Controlling administered price inflation • Controlling administered price inflation

4 Strategies

1. Price Affordability 2. Supply Availability 3. Well Managed Distribution 4. Effective Communication

Strengthening production, Encouraging Government trade Improving Strengthening Stabilizing Managing Strengthening Improving data food reserves cooperation trade central-regional the price demand side institution quality and food between infrastructure coordination export-import regions management

Source: Bank Indonesia 72 Improving the Effectiveness of Monetary Policy Transmission

Bank Indonesia has instituted a Reformulation of Monetary Policy Operations Framework which consists of 3 pillars; (1) implementation of BI 7day Reverse Repo Rate; (2) implementation of reserve requirement averaging; and (3) continue to implement money market deepening program.

Reformulation of Monetary Policy Operational Framework

Implementation of Reserve Implementation of Money Implementation of BI 7 Requirement (RR) Market Deepening Day Reverse Repo Rate Averaging Program

Enhancement of monetary policy Enhancement of banking liquidity Enhancement of instruments signal management and transactions

Source: Bank Indonesia 73 Enhancement of Monetary Operations Framework

PREVIOUS JIBOR • Can be traded among contributor banks for 10 minutes. • Up to the amount of Rp10 billion. • Up to 1-month tenor.

CURRENT JIBOR (as per June 1st, 2016) • Can be traded among contributor banks for 20 minutes. • Up to a total of Rp20 billion. • Up to 3-month tenor.

Source: Bank Indonesia 74 Intermediation Performance Remains Positive

The growth of bank lending has demonstrated an increasing trend since early 2018, expected to grow by 10-12% by the end of this year. Meanwhile, capital raising in the capital market (particularly through corporate bond issuance) remains strong.

Bank lending growth exhibits a strengthening trend in 2018 Financing distributed by multifinance companies starts to improve

IDR tn % yoy IDR Tn yoy Bank Loans YoY Growth (rhs) 450 13% 5,500 14% 12.12% 432 12% 10% 5032 425 5,000 10% 8% 8% 5.82% 4,500 400 6% 5% 4% 4,000 375 2% 3%

3,500 0% 350 0%

Capital raising in the capital market, particularly through corporate Gross premium revenues in the domestic insurance industry are also bonds issuance, remains strong in 2018 continuously growing

IDR Tn IDR Tn 450 180 IPO equity Rights Issue Corporate Bonds & Sukuk 400 160 350 140 286 300 120 98.16 100 250 80 200 60 150 40 25.61 100 14 20 50 0 0 2012 2013 2014 2015 2016 2017 Jan-Sept 2012 2013 2014 2015 2016 2017 Jan-Agus18 2018 Source: Financial Service Authority (OJK) 75 Financial Institutions Remain Robust

Domestic financial institutions demonstrate a generally sound condition. Capital adequacy is maintained well above the minimum requirements. Profitability and leverage are maintained at a sufficient level.

CAR of the banking sector remains at a high level. As of Aug-18, CAR & Risk-based capital (RBC) of the insurance industry also remained high, Tier-1 Capital was 23.01% & 21.24%, respectively well above the minimum threshold (120%)

% CAR Tier 1 Life Insurance General Insurance (rhs) 24.0 550% 350% 23.01 23.0 309% 320% 500% 22.0 21.24 290% 21.0 450% 260% 20.0 400% 434% 230% 19.0

18.0 350% 200%

Gearing ratio of multifinance companies was at 3.01 times, providing Profitability of the banking sector was relatively stable ample room for future growth % 6.0 Net Interest Margin Return on Assets 3.5 5.14 3.01 5.0 3.0 4.0 2.5 3.0 2.47 2.0 2.0

1.0 1.5

0.0 1.0

Source: Financial Service Authority (OJK) 76 Ample Liquidity; Well-maintained Asset Quality

The liquidity ratios in the banking sector are relatively stable amidst recent volatility in the financial market. Insurance industry also demonstrates an stable level of investment adequacy ratio. The non-performing loan/financing ratio is maintained below the threshold.

The ratio of liquid assets to deposits in the banking sector is relatively Investment adequacy ratio in the insurance industry was maintained stable above 100%

% % % Life Insurance General Insurance 140 Liquid Assets to Non-Core Deposits (lhs) Liquid Assets to Deposit (rhs) 30 210 * 130 26 185 120 190 22 110 170 100 18 150 90 124 14 130 80 10 70 110 60 6 90

*The spike in this ratio was due a change in calculation methods. As of Aug-18, the gross & net NPL ratios of the banking sector were NPF ratio of the multifinance industry was 3.11% as of Aug-18, 2.74% & 1.20% respectively, maintained below the threshold maintained well below the 5% threshold % 3.5 NPL Net NPL Gross 4.0%

3.0 2.74 3.5% 3.11% 3.0% 2.5 2.5% 2.0 2.0% 1.5 1.2 1.5% 1.0 1.0% 0.5 0.5%

0.0 0.0%

Source: Financial Service Authority (OJK) 77 Well-mitigated Market Risks

Amidst the increasing market volatility, the risk profile of financial institutions remains manageable. Net open position of the banking sector was maintained at a low level, while the investment value of domestic institutional investors (mutual funds, insurers, and pension funds) was relatively stable.

Amidst the depreciating Rupiah, net open position in the banking Mutual funds’ net asset value (NAV) was relatively stable amidst the sector was kept far below the maximum limit (20%) fluctuating market, with a low level of volatility

% IDR Tn 4 6,800 530 NAV Mutual Funds 6,600 500 3 IDX (rhs) 6,400 470 6,200 440 6,000 2 410 1.48 380 5,800 5,600 1 350 320 5,400 290 5,200 0 260 5,000

Multifinance companies’ exposures to foreign debt had generally been The investment value of insurers & pension funds was relatively stable mitigated through hedging measures

IDR Tn IDR Tn IDR tn Insurance Pension Funds (rhs) Domestic Debt Foreign Debt 1,100 300 1,037 180 1,050 275 160 1,000 179 140 950 250 120 99 900 254 225 100 850 80 800 200 60

Source: Financial Service Authority (OJK) 78 Capital Markets Affected by Global Dynamics

Recent developments in the global economy and financial markets have generated some pressures on the domestic capital markets. However, the overall market stability is still maintained.

The IDX Composite Index experienced some pressures, but its correction The volatility in the domestic market is still observed, but now tends is relatively moderate compared to some other emerging markets to ease

Stock Index Performance 19 October 2018 vs 29 Desember 2017 260 Comp Bond Index Comp Stock Index (rhs) 7,000 WORLD -1.86 THAI -4.90 KOREA -12.61 240 6,500 INDO -8.16 HKN -14.57 SIN -10.00 220 6,000 PHIL -16.44 CHIN -22.88 MAL -3.60 JPN -1.02 200 5,500 EURO -7.84 AS 2.67 RUS 12.25 180 5,000 BRAZ 9.74

TURK -15.90

Jul-17 Jul-18

Jan-17 Jan-18

Jun-17 Jun-18

Oct-17 Oct-18

Apr-17 Apr-18

Feb-17 Feb-18

Sep-17 Sep-18

Dec-17

Mar-17 Mar-18

Aug-17 Aug-18

% Nov-17 May-18 -27 -23 -19 -15 -11 -7 -3 1 5 9 13 May-17 Recent nonresident outflows in the domestic markets exhibit an Government bond yields tend to increase in line with the increased easing trend policy interest rate IDR Tn Gov't Debt Securities Equity Yield (%) 5-yr Yield 10-yr Yield 20-yr Yield IDR (rhs) 15,500 40 10 15,000

20 9 14,500 8 14,000 0 13,500 7 13,000 -20 6 12,500

-40 5 12,000

Jul-17 Jul-18

Jan-17 Jan-18

Jun-18 Jun-17

Jul-17 Jul-18

Oct-17 Oct-18

Apr-17 Apr-18

Feb-17 Feb-18

Sep-17 Sep-18

Dec-17

Mar-17 Mar-18

Jan-17 Jan-18

Aug-18 Aug-17

Nov-17

Jun-18 Jun-17

May-17 May-18

Oct-17 Oct-18

Apr-17 Apr-18

Feb-17 Feb-18

Sep-17 Sep-18

Dec-17

Mar-17 Mar-18

Aug-17 Aug-18

Nov-17

May-17 May-18 *as data 19 September 2018 Source: Bloomberg, IBPA, Indonesia Stock Exchange, Ministry of Finance 79 Strategic Policies in Financial Sector

Supporting infrastructure financing and Supporting innovations in digital deepening the capital market finance

Enhancing variability of financing instruments . Perpetual bonds, green bonds, municipal bonds . Investment products for mortgage Issuing the guiding principles for the providers of digital financial services, including for registering, licensing, and the Simplification of issuance process in crowdfunding scheme the capital market . Simplifying issuance process of debt securities and sukuk for professional investors Directing financial institutions to synergize with the fintech sector or to establish a Expanding the investor base fintech business line . Expanding the access of domestic retail investors to the capital market . Promoting the participation of local financial Promoting the role of fintech lending in institutions through the establishment of local supporting government programs, including securities companies in online retail sales of government debt securities Strengthening the role of NBFIs in infrastructure development . The provision of credit guarantee products by credit guarantee companies & insurers

Source: Financial Service Authority (OJK) 80 Strategic Policies in Financial Sector Enhancing financial literacy & inclusion

OJK has also built a strong foundation for financial inclusion programs, to ensure access to financial products & services by Indonesians of all social classes. Such initiatives also include the enhancement of financial literacy and financial consumer protection.

Promoting the Developing Developing Strengthening establishment financial Enhancing the micro-credit the role of of Islamic education role of the products with Financial Access microfinance models utilizing “Investment additional Acceleration institutions various delivery Alert Taskforce” business support Taskforce (TPAKD) (“Bank Wakaf channels (“KUR Klaster”) in local areas Mikro”)

The result of OJK’s 2016 national survey demonstrated an improvement in financial literacy & inclusion among Indonesians compared to that of 2013, but there is still room for further improvement.

21.8% 29.7% 59.7% 67.8%

Financial Financial Literacy 2013 2016 Inclusion 2013 2016

Source: Financial Service Authority (OJK), June 2017 81 A Comprehensive Financial Deepening Program …strategy to tackle challenges in deepening Indonesia’s financial markets

In Apr-2016, the Minister of Finance, the Governor of Bank Indonesia, and the Chairman of the Board of Commissioners of the Financial Services Authority launched a Coordination Forum for Development Financing through Financial Market (FK-PPPK). The three authorities have agreed to formulate “The National Strategy of Financial Market Development”

Vision: To Establish Deep, Liquid, Efficient, Inclusive, and Safe Financial Market Mission: Financial Market as Sources of National Development Financing

TARGET KEY PERFORMANCE INDICATOR STRATEGIC ACTION PLAN 1 2 3 POLICY COORDINATION, ECONOMIC FUNDING & MARKET INFRASTRUCTURE 3 Pilars HARMONIZATION & RISK MANAGEMENT DEVELOPMENT EDUCATION

Money Bond Stock Syariah Structure Product FX Market 6 Markets Market Market Market Market Market

7 Elements Fund Market Regulatory of Financial Infrastructure Framework Market Instrument Benchmark Rate & Coordination & Ecosystem Standardization Education Intermediaries

Source: Bank Indonesia 82 Continuous Program on Capital Market Deepening …continuously strengthened, including through capital market deepening initiatives

Enhancing the supply-side Strengthening market infrastructure

. Simplification of public-offering requirements and . Expansion of Single Investor Identification (SID) coverage procedures . Development of electronic trading platform (ETP) in the . Development of debt market debt market . Development of mutual fund industry . Development of Integrated Investment Management . Development of other products, including those to System (S-INVEST) support infrastructure development (private equity . Enhancing the clearing and settlement process funds, REITs, ABS) . Enhancement of capital market data warehouse . Development of Islamic capital market . Development of Extensible Business Reporting Language . Development of municipal bonds (XBRL) for issuers

Enhancing the demand-side Strengthening governance

. Enhancing the role of the domestic institutional . Development of market players’ capacity investors (insurers & pension funds) in capital . Enhancement of GCG for publicly-listed companies markets . Development of repo regulations and infrastructure . Development of the domestic investor base (conducting investor education programs) . Expansion of distribution channels of market products

Source: Financial Service Authority (OJK) 83 BI’s Roles in Supporting Distribution of Non-Cash Social Assistance (NCSA)

BI supports government’s program of shifting social assistance to targeted non cash social assistance disbursement through the electronic payment system. In the future, electronic mechanism disbursement will be also applied to LPG subsidy.

NCSA Programs Pilot Project

Family Hope Program Smart Indonesia (Program Keluarga Program (Program Harapan -PKH) Indonesia Pintar-PIP) Gradual

Implementation 2016

9876543210 - XXYYZZ 2020 12345678 Full Non Cash Food Assistance Implementation (Bantuan Pangan Non Tunai – BPNT) LPG Subsidy Interconnected & interoperable payment system

Source: Bank Indonesia 84 Progress of NCSA Programs

Family Hope Program Non Cash Food Assistance (Program Keluarga Harapan - (Bantuan Pangan Non Tunai - PKH) BPNT)

• The Family Hope Program (PKH) is a program • BPNT is a poverty alleviation and social that provides cash to very poor households. protection program that is managed by the Rp 1,89 million /year will be granted for each central government. It provides subsidized rice household. PKH will be granted every February, and eggs to low-income households. Rp 110 May, August, and November. thousand/month will be granted for each household as BPNT that can be used in certain stores which called e-warong. • As of December 2017, PKH has been distributed to 6,0 million households on non- cash basis. • As of December 2017, BPNT was distributed to 1,2 million households in 44 cities. • PKH is expanded to 10 million households in 514 regencies/cities in 2018. • BPNT is expanded to 10 million households in 217 regencies/cities on the 25th of each month in 2018.

Source: Bank Indonesia 85 Stronger Fundamentals Facing the Headwinds

Inflation Rate (%) IDR Movement (%) Foreign Reserves (USD bn) Significantly higher than 1998 & 2008, ample to cover Inflation controlled within the target range IDR depreciated year-to-date in September 2018 6.3 months of import and external debt repayment

1998 -197 1998 82.4 1998 17.4

2008 -35 2008 12.1 2008 50.2

SeptSep-15 ‘18 26.8.88 (yoy) 22-Oct-18 -10.65 (ytd) SeptSep-15‘18 114.8

Non-Performing Loan/NPL (%) More Liquid Market (%) NPL level (gross) is below the maximum threshold of 5% Overnight interbank money market rate is relatively lower 62 1998 30

2008 3.8 10.5 5.395.7

AugustAug-15‘18 22.8.7 1998 2008 SeptJul-15 2018

External Debt (Public & Government Debt/GDP External Debt/GDP Private) to FX Reserve Ratio Slightly higher than 2008, but Significantly lower than 1998 crisis Consistently well-maintained below 30% significantly lower than 1998

8.6x 3.1x 27.4% 3.0x 100.0% 116.8% 33.2% 1998 2008 29.8% 34.3% 1998 2008 1998 2008 Q2 - 2018 Q2 - 2018 Q2 - 2018

86 Outlook of Domestic Economy Remains Robust ...domestic economic growth is predicted to be higher in 2018

2018 Economic Outlook

 Economic growth in 2018 is projected in the 5.0-5.4% range, on sound investment and consumption performance, strong building and non-building investment, backed by infrastructure development and investment in the manufacturing industry.  Inflation is predicted to remain within the target range for 2018, namely 3.5±1%, with the current account deficit is expected to remain under control and within a safe threshold that is not exceed 3.0% of GDP in line with domestic economic improvements.  Credit growth is predicted to grow in the 10.0 -12.0% range, in line with the domestic economy ganing momentum dan ongoing consolidation in the corporate and banking sectors.

Economic Growth Inflation CAD (% of GDP) Credit Growth

2017 5.07% 3.61% 1.7% 8.2% Realization

2018 5.0–5.4 % 3.5±1% <3.0% 10.0-12.0%

Source : Bank Indonesia 87 Section 6 Progressive Infrastructure Development: Strong Commitment on Acceleration of Infrastructure Provision The Government has Enacted Various Reforms to Accelerate Infrastructure Provision

Fiscal Reforms Institutional Reforms Regulatory Reforms Viability Gap Funding (VGF) KPPIP Direct Lending Increase project financial feasibility by KPPIP is actively involved in accelerating Allow guarantee for direct lending to SOE contributing up to 49% of the construction delivery of priority infrastructure projects to accelerate financial close process for cost (MoF Reg. No. 223/2012) infrastructure projects (Presidential Reg. No. PT. Sarana Multi Infrastruktur 82/2015) Availability Payment Merging between PT. SMI and Gov’t Land Acquisition Issuance of regulatory framework to allow Investment Center (PIP) to become an annuity payment by the Government during infrastructure funding company Stipulate land acquisition acceleration concession period to concessionaire since based on Law No. 2/2012 (Presidential Reg. project operation based on infrastructure Indonesia Infras. Guarantee Fund (IIGF) No. 148/2015) and land acquisition fee service availability (MoF Reg. No. 190/2015 payment for impacted community IIGF has the potential to provide project for Central Gov’r and MoHA Reg. No. (Presidential Reg. No.56/2017) 96/2016 for Regional Gov’t.) guarantee for non-PPP projects PPP Unit Economy Packages Land Revolving Fund Provide facilities to help GCA on preparing Conduct deregulation for issues hindering A revolving-fund sourced from State Budget, PPP project (PDF/TA) infrastructure delivery and develop a task to accelerate land acquisition (MoF Reg. No. force under CMEA to ensure the 220/2010) BLU LMAN effectiveness of economic packages implementation Risk-sharing Guidelines The State Asset Management Agency (BLU LMAN) is mandated to provide land fund for IIGF has issued risk allocation and mitigation National Strategic Projects to ensure timely guidelines for PPP project land acquisition process Tax Incentives (Tax Holiday) Indonesia Infrastructure Guarantee Fund MoF Reg. No.35/2018 allowed 100% Tax (IIGF) Holiday for 17 Pioneering Industries for 5 – IIGF has the potential to provide project 20 years depending on the investment value guarantee for non-PPP projects

Source: Committee for Acceleration of Priority Infrastructure Delivery (KPPIP) 89 Some of Most Recent Reforms Policy reforms are aiming to create a more conducive investment climate for infrastructure delivery

Presidential Reg. No. 20/2018 on Use of Foreign Labor – released on March 2018

This regulation aims at simplifying the permit application process for foreign workers, hence making the process more efficient and faster, in order to rise foreign direct investment in Indonesia

Presidential Reg. No. 56/2017 on Social Impact Handling in Land Acquisition Process for PSN – released on June 2017

This Presidential Reg. allows the Executing Agency to pay land acquisition compensation to the impacted community who does not have official rights over the land required for PSN. This regulation helps to solve the land acquisition problem due to community objection over the land use.

MoF No. 60/2017 on Procedures for the Provision of Central Government Guarantee for the Acceleration of the National Strategic Projects Implementation – released on May 2017

The supporting regulation for Presidential Reg. No. 3/2016 on the Acceleration of the National Strategic Projects Implementation. This regulation regulates the scope and general requirements and procedures to propose and grant guarantees, as well as allocate state budget obligation on government guarantees to all PSN. The guarantee provision is expected to increase the feasibility and trust of investors to participate in the implementation of PSN.

Government Reg. No. 13/2017 on National Spatial Plan (RTRWN) – released on April 2017

The issuance of RTRWN can resolve spatial planning mismatch in the implementation of infrastructure projects listed in the annex of Government Reg. No. 13/2017. A number of breakthroughs were developed, and one of them is that the Minister of Agrarian and Spatial can issue a recommendation of spatial utilization; so that the process of obtaining project permission can be done.

MoF No. 21/2017 on Procedures for Land Acquisition for National Strategic Projects and Asset Management of Land Acquisition by State Asset Management Agency – released on February 2017

The implementing regulation of Presidential Reg. No. 102/2016 on Financing of Land Acquisition for the Development of Public Interest in the Framework of the National Strategic Implementation. This regulation becomes the legal basis for the financing of the procurement of National Strategic and Priority Projects by BLU LMAN.

Source: Committee for Acceleration of Priority Infrastructure Delivery (KPPIP) 90 Reforms Along the Project’s Life Cycle ...to encourage and accelerate infrastructure project using PPP scheme

Government of Indonesia

Project Viability Guarantee Availability Land Development Funding Tax Facilities Fund Payment Acquisition Facility (PDF) Gap (VGF)

Preparation Bidding Process Construction

A facility with Guaranteeing A scheme in which contribution to Govt. concessionaires MoF Reg. No. construction contractual receive sum of A facility to support 159/PMK. cost to obligations money periodically land acquisition for 010/2015 re: tax Project increase under from central or infrastructure holiday for pioneer development project infrastructure regional projects particularly sector, such as facility contributing financial concession government after projects that involve base metal, oil to assist GCA on viability agreements and the completion of private sector Mof Regulation refinery, basic PPP project an asset. No 130/PMK. petrochemical, preparation Managing MoF Regulation, Managing enitiy: 08/2016 re: machinery, (PDF&TA) Entitiy: and MoHA Ministry of Finance, Govt guarantee renewable energy, Ministry of Regulation on Ministry of Agrarian for electricity & telco equipment Managing entity: Finance based Availability and Land project industries. Sector KPPIP, PT SMI PT on GCA Payment has been Spatial/BPN and acceleration will be further IIF, and Ministry of proposal ratified. BLU-LMAN expanded Finance Managing entity: Gov’t. IIGF and MoF Managing entity: Gov’t. commitment: Managing entitiy: commitment: Govt’s Ministry of Finance US$ 12 mn (2016) Ministry of Finance 49% max. Per comitment: & Ministry of project cost US$ 450 mn Home Affairs

Source: Committee for Acceleration of Priority Infrastructure Delivery (KPPIP) 91 Efforts to Accelerate Infrastructure Provision

Regulation improvement to accelerate land procurement process . The Government of Indonesia issued Law No. 2 of 2012 on Land Acquisition for Public Interest, with a purpose to provide certainty about the land acquisition duration for the Government Contracting Agencies and the Investors. The Law sets an estimated 583 days maximum time to complete the land acquisition process. . For its implementation, the Law No. 2 of 2012 was supported by the Presidential Regulation No. 71 of 2012 on Land Acquisition Implementation for Developing Law No. 2/2012 was successfully applied in: Public Facilities, which has been revised into the Presidential Regulation No. 30 of 2015. The Amendment to the Regulation allows a Business Entity to allocate 1. Palembang – Indralaya section of the Trans funding for a land acquisition which can be reimbursed by the Government Sumatera Toll Road Project following the completion of land acquisition process. With this Regulation, the 2. Java North Line Double Track Rail Project land acquisition process is expected not to be delayed by the unallocated budget or the delay on the budget disbursement.

Land Procurement Process as Stipulated in Law No. 2 of 2012

Source: Committee for Acceleration of Priority Infrastructure Delivery (KPPIP) 92 Efforts to Accelerate Infrastructure Provision …the establishment of Indonesia Asset Management Agency (LMAN)

Government has established State Asset Management Unit (LMAN) as a solution to accelerate the land acquisition through the provision of land acquisition fund

LMAN at a Glance Land Acquisition Budgeting Scheme 1. LMAN was established in December 2015 through the issuance of MoF Reg. 1. Unutilized fund can be allocated for 219/2015 concerning State Assets the following year Management 2. In 2016, BLU LMAN was mandated to 2. Non-project-specific land acquisition provide land acquisition fund as a support fund allocation. Unused allocated to Ministry of Public Works due to US$ fund can flexibly be made available 1,081 Mio shortage of fund to acquire land for the other project for priority toll roads 3. Land acquisition fund for PSN projects 3. The scope of support is broaden for all is managed under one agency National Strategic Projects through the issuance of MoF Reg. 21/2017 concerning land acquisition financing guideline for PSN This LMAN initiative provides better 4. In January 2018, LMAN has disbursed up flexibility, coordination and to US$ 881.48 Million (IDR 11.9 Trillion) management of land acquisition through bridging finance scheme for 27 toll fund provision for National Strategic road projects, and planned to start the Projects (PSN) implementation of direct payment scheme

Source: Ministry of Finance 93 New Fundamental Regulations Have Been Initiated in 2017 to accelerate infrastructure projects delivery

Government Reg. No. 13/2017 on National Spatial Plan (RTRWN) The issuance of RTRWN can resolve spatial planning mismatch in the implementation of infrastructure projects listed in the annex of Government Reg. No. 13/2017. A number of breakthroughs were developed, and one of them is that the Minister of Agrarian and Spatial can issue a recommendation of spatial 1 utilization; so that the process of obtaining project permission can be done.

MoF No. 60/2017 on Procedures for the Provision of Central Government Guarantee for the Acceleration of the National Strategic Projects Implementation The supporting regulation for Presidential Reg. No. 3/2016 on the Acceleration of the National Strategic Projects Implementation. This regulation regulates the scope and general requirements and procedures to 2 propose and grant guarantees, as well as allocate state budget obligation on government guarantees to all PSN. The guarantee provision is expected to increase the feasibility and trust of investors to participate in the implementation of PSN.

Presidential Reg. No. 56/2017 on Social Impact Handling in Land Acquisition Process for PSN

This Presidential Reg. allows the Executing Agency to pay land acquisition compensation to the impacted 3 community who does not have official rights over the land required for PSN. This regulation helps to solve the land acquisition problem due to community objection over the land use.

MoF No. 21/2017 on Procedures for Land Acquisition for National Strategic Projects and Asset Management of Land Acquisition by State Asset Management Agency The implementing regulation of Presidential Reg. No.102/2016 on Financing of Land Acquisition for the Development of Public Interest in the Framework of the National Strategic Implementation. This 4 regulation becomes the legal basis for the financing of the procurement of National Strategic and Priority Projects by BLU LMAN

Source: Committee for Acceleration of Priority Infrastructure Delivery (KPPIP) 94 Under Presidential Reg. No.56/2018, PSN list has been revised into 223 Projects and 3 Programs

26 53 18 Projects Projects Projects 12 Projects Sulawesi Sumatra Kalimantan US$22.8 B Maluku & Papua US$40.4 B US$35.6 B US$34.4 B

89 Projects 3 Programs National projects Projects 1 2 Projects Java US$99.7 B US$73.8 B 13 Projects

Bali & Nusa Tenggara US$0.7 B Exchange rate: US$ 1 = IDR 13,500 PSN includes 15 sectors at project level and 3 sectors at program level Project Program

Electricity 1 Program SEZs & IEs Clean Water & Road Dams Railway Energy Ports Airports 29 Projects Sanitation 69 Projects 51 Projects 16 Projects 11 Projects 10 Projects 7 Projects 8 Projects Aeroplane Industry 1 Program

Economic Equality Smelter Technology Housing Fisheries/Farming Sea Dike Education Irigation 1 Program 6 Projects 4 Projects 3 Projects 1 Projects 1 Projects 1 Projects 6 Projects

Source: Committee for Acceleration of Priority Infrastructure Delivery (KPPIP) 95 PSN may receive privileges as stipulated in the Presidential Reg. No. 3/2016 j.o. the Presidential Reg. No. 58/2017

Acceleration of Non- Determination of National State Budget Strategic Projects Projects

Settlement of Permit & Non- Legal Issues 12 01 permit Completion 11 02 Accelerate Goods and Spatial Planning Service Procurement 10 03

Problems and 09 04 Land clearing Hindrance Completion acceleration

08 05 Local Content SOE’s Assignment 07 06 Utilization

Projects Monitoring Government Additional Facilities via KPPIP IT System Guarantee Provision

Existing Facilities

Source: Committee for Acceleration of Priority Infrastructure Delivery (KPPIP) 96 Progress on 223 Projects and 3 Programs PSN

The Estimated Investment Value for 223 Projects + 3 Programs PSN1 5 Sectors with Highest State Investment Value Budget State Budget 10% Total Investment US$ 31.7 Bn Value2 SOEs/RSOEs Energy SOEs/ US$ 94.3 Bn 11 Projects RSOEs US$ 307.4 US$ 89.8 Bn Private 31% 59% Private Billion US$ 181.4 Bn Electricity

1Exclude 7 projects which investment value are still unknown 1 Program Exchange rate : US$ 1 = IDR 13,500 US$ 76.7 Bn Progress of National Strategic Projects + 3 Programs (per September 2018)2 3 projects already completed Roads 69 Projects 51 projects and 1 electricity program are in 1% US$ 49.7 Bn construction and partial-operation phase 23% 23% 23 projects are in construction and will start operating in 2018 Railways 52 projects are in construction and will start 16 Projects 3% operating in 2019 US$ 29.2 Bn 10% 37 projects are in construction and will start 17% operating after 2019 SEZs and IEs 6 projects in transaction 31 Projects 23% 51 projects and 1 Airplane Industry Program in US$ 31 Bn preparation 2) Excluding the economic equality program that will be reported separately Source: Committee for Acceleration of Priority Infrastructure Delivery (KPPIP) 97 In 2016 - September 2018, 33 PSN has been Completed with Total Investment Value of Rp 96.9 Trillion

2016 1 Gempol – Pandaan Toll Road

2 Sentani Airport, Jayapura, Papua

Juwata Airport, Tarakan, North 3 Kalimantan 27 Aruk National Border, West Kalimantan 4 Fatmawati Soekarno Airport, Bengkulu Motamassin National Border, East Wini National Border, East Nusa 5 Mutiara Airport, Palu 13 28 Nusa Tenggara Tenggara 6 Matahora Airport, Wakatobi 2017 Skouw National Border, Jayapura, 29 Teritip Dam 14 Soreang – Pasirkoja Toll Road, West 7 Labuan Bajo Airport, Komodo Island Papua 21 Java Pembangunan Saluran Suplesi Daerah 30 Irigasi Umpu Sistem (Way Besai), Development of Soekarno Hatta 15 Paya Seunara Dam, Sabang, Aceh 8 Mojokerto – Surabaya Toll Road, East Lampung Airport (Include Terminal 3), Banten 22 16 Rajui Dam, Pidie, Aceh Java 9 Kalibaru Port, Jakarta Jatigede Dam, Sumedang, West Tanjung Priok Access Road, DKI 17 23 Jan - Sep 2018 Belawan-Sei Mengkei Gas Pipe (75 Java Jakarta 10 mmscfd), North Sumatera Bajulmati Dam, Banyuwangi, East 24 31 Prabumulih – Kertapati Railway 18 Raden Inten II Airport, Lampung Entikong National Border, West Java 11 32 Raknamo Dam Kalimantan 25 Jangkrik and North East Jangkrik Field 19 Nipah Dam, Madura, East Java 33 Tanju Dam Mota’ain National Border, East Nusa Nanga Badau National Border, West 12 26 Tenggara 20 Titab Dam,Buleleng, Bali Kalimantan

Source: Committee for Acceleration of Priority Infrastructure Delivery (KPPIP) 98 Progress on 37 Priority Projects

From the revised National Strategic Projects, the Government has selected a list of 37 Priority Project to be the focus of infrastructure provision.

1. Balikpapan-Samarinda Toll Road 13. LRT of DKI Jakarta 26. Tuban Oil Refinery 2. Manado-Bitung Toll Road 14. Kuala Tanjung International Hub Seaport 27. RDMP/Revitalization of the Existing Refineries 3. Panimbang-Serang Toll Road 15. Bitung International Hub Seaport (Balikpapan, Cilacap, Balongan, Dumai, Plaju) 4. 15 Segments of Trans – Sumatera Toll 16. Patimban Port 28. Abadi WK Masela Field Road 17. Inland Waterways Cikarang-Bekasi-Laut (CBL) 29. Unilization Field Has Jambaran-Tiung Biru 5. Probolinggo – Banyuwangi Toll Road 18. Palapa Ring Broadband 30. Indonesian Deepwater Development (IDD) 6. Yogyakarta – Bawean Toll Road 19. Batang, Central Java Power Plant (CJPP) 31. Tangguh LNG Train 3 Development 7. SHIA Express Railway 20. Central – West Java Transmission Line 500 kV 32. West Semarang Drinking Water Supply System 8. MRT Jakarta South-North Line 21. Indramayu Coal-fired Power Plant 33. Jakarta Sewerage System 9. Makassar-Parepare Railway 22. Sumatera 500 kV Transmission (4 Provinces) 34. National Capital Integrated Coastal 10. Light Rail Transit (LRT) of Jakarta- 23. Mulut Tambang Coal-fired Power Plant (6 Development (NCICD) Phase A Depok-Bogor-Bekasi Provinces) 35. Jatiluhur Drinking Water Supply 11. LRT of South Sumatera 24. PLTGU (16 Provinces) 36. Lampung Drinking Water Supply 12. East Kalimantan Railway 25. Bontang Oil Refinery 37. Waste to Energy Program in 8 cities Source: Committee for Acceleration of Priority Infrastructure Delivery (KPPIP) 99 Progress on 37 Priority Projects

Progress of 37 Priority Projects (per June 2018) Recent Milestones

Palapa Ring West package has been fully operasional since April 2018.

32% 20 projects are in construction Yogyakarta-Bawen Toll Road 5 projects are in transaction 54% Outline Business Case has been done on December 2017.

12 projects are in preparation 14% West Semarang Water Supply System: On March 2018, pre-qualification stage has resulted 4 shortlisted bidders Funding Scheme of 37 Priority Projects Mass Rapid Transit (MRT) Jakarta South-North Total Investment Value Allocation of repayment liability on additional-loan for Phase I US$ 181.6 Billion and Phase II has been decided in the KPPIP Ministerial meeting – 10% 49% will be borne by Central Government and 51% will be borne US$92.4 billion from Private/ Provincial Government of DKI Jakarta. PPP Patimban Port US$71.8 billion from SOE/ 51% Regional SOE Loan Agreement has been signed on 15 November 2017. 39% US$17.5 billion State/ Regional Budget (including G-to-G loan)

Exchange rate : US$ 1 = IDR 13,500 Note: This data is still going to be verified by The Executive Office of President (KSP) Source: Committee for Acceleration of Priority Infrastructure Delivery (KPPIP) and Indonesia’s National Government Internal Auditor (BPKP) 100 Energy Sector: the Progress of 35.000 MW Program

Debottlenecking through regulation: Average economic growth of 6.7% requires 7,000 MW / year or 1. Regulation No.1/2015 concerning electricity Launching 35.000 MW 35,000 MW / 5 years supply cooperation & joint utilization of the by the President in Cabinet Meeting electrical network among license holders. Goa Beach Sanden (Kepmen ESDM No. 0074/2015 on Progress of DIY RUPTL 2015-2024) 2. Regulation No.3/2015, concerning 35,000 MW Procedures of Purchasing Electrical Power and benchmark prices for Electrical Power through the Direct Selection & Appointment.

17 Dec ‘14 Jan ‘15 Jan ‘15 16 Mar ‘15 4 May ‘15

Cabinet Meeting “There’s electricity crisis in The progress so far: June‘17 Indonesia, requires construction of large capacity plant " 35,000 MW Program Distribution

Kalimantan Sulawesi No Phase MW % PLN: 900 MW PLN: 2,000 MW Private: 1,470 MW Papua Private: 1,735 MW PLN : 220 MW 1 Operating 2,614 7 Transmission: 5,604 ckt.km Transmission: 5,275 ckt.km Substation: 4,390 MVA Private: 0 MW 2 Construction 18,457 52 Substation: 3,500 MVA Transmission: 364 ckt.km Sumatera Substation: 460 MVA 3 Signed Power-purchase Agreement 11,117 32 PLN: 1,100 MW Private: 8,990 MW 4 Procurement 2,153 6 Transmission: 18,729 ckt.km Substation: 35,521 MVA 5 Planning 958 3 Maluku Nusa Tenggara Note : Progress of 35,000 MW Electricity Program as of September 2018 Jawa & Bali PLN: 260 MW PLN: 670 MW PLN: 5,000 MW Private: 12 MW Private: 0 MW Private: 13,697 MW Transmission: 653 ckt.km Transmission: 2,347 ckt.km Transmission: 9,185 ckt.km Substation: 620 MVA Substation: 1,410 MVA Substation: 66,265 MVA Source: PLN Source: Committee for Acceleration of Priority Infrastructure Delivery (KPPIP) 101 Acceleration of 35.000 MW Program

The Government has issued Presidential Regulation No. 4/2016 on Electricity Infrastructure Acceleration to accelerate power projects

Government Support (outside Guarantee) Local Content • Provision of Primary Energy Obligation on the usage of local content • Provision of Renewable Energy Government through an open book system, price • Simplicity of Permits and non-Licensing guideline, reverse engineering or other • Spatial Planning methods to maximise the local content. • Land acquisition Assignment • Resolution on Legal Matters

PT PLN

Provision of Electricity

1 2A 2B

SJKU* EPC Powerplant PLN Subsidiary Independent Ministry of and Transmission (Joint Venture) Power Producer Finance

Strengthen Equity Strengthen PLN‘s Balance Sheet Loan from Equity Injection by PT PLN’s divident independent lenders the Government allocation Refinancing Hedging Bond issuance Asset Direct Company by PT PLN Revaluation Lending Tax Holiday *)SJKU=Surat Jaminan Financial Asset Optimization Kelayakan Usaha/ Direct Other types Business Viability Lending of funding Guarantee Letter

Source: Committee for Acceleration of Priority Infrastructure Delivery (KPPIP) 102 Significant Progress on Infrastructure Projects

Roads Improving Monitoring System on Infrastructure Projects1

KPPIP developed an integrated IT System for monitoring of national strategic and priority projects, providing database on projects’ latest status which can be effectively utilized for monitoring and decision-making purposes.

Trans-Sumatra Toll Road Merah Putih Bridge, Ambon Database Platform data outlook Dams Drinking Water Processing Project information that is efficient and such as map, track, functional using a existing study and user-friendly latest project status. framework.

Jatigede Dam (Operational) Umbulan Drinking Water Provision System, East Java Transportation

An integrated IT Record decisions related

Jakarta MRT Project2 Terminal 3 Ultimate Soekarno-Hatta2 system with to projects and monitoring capacity synchronize the for stakeholders, so implementation schedule that they can have that can be utilized by real time data. stakeholders.

1 Source: Committee for Acceleration of Priority Infrastructure Delivery (KPPIP) 2 Not funded from National Budget New Tanjung Priok Port Project2 Nop Goliat Dekai, Papua 103 Infrastructure Projects and Financing Schemes Promotion of Infrastructure Development to Accelerate Economic Growth

Infrastructure Development is a Key Priority Establishment of PPP Unit

 Infrastructure Development in order to: Broad  Champion project preparation and acceleration of the PPP 1. Accelerate growth particularly in rural areas Objective agenda in Indonesia 2. Support industrial development and tourism  Improve quality of project selection under KPPIP – OBC criteria 3. Reduce unemployment and poverty Core  Support project preparation through PDF support and highly  Infrastructure fundraising needs: $357.9 bn (or equivalent to IDR4,796.2 tn) Mandates qualified transaction advisors  245 National Strategy Projects under National Medium Term Plan for 2015 –  Act on behalf the Minister of Finance in providing government 2019 with an estimated total cost of IDR 4,197 tn (USD 313 bn) support and approvals for projects  37 priority infrastructure projects with an estimated cost of IDR 2,490 tn (USD  Coordinate all public finance instruments 180 billion) Additional  Provide input for PPP Policy program Development and Regulations  Majority of 37 priority projects are expected to commence commercial operation Mandates  Implement capacity building for Govt. Contracting Agency (GCAs) by 2018 - 2022  One stop shop for PPP promotion & Information

Budget Public Private Partnership SOE & Private Sector

 Central & regional budget  Certain infrastructure projects to be funded and operated through a  Government to inject capital into SOEs: (special allocation fund & partnership between the Indonesian government and the private sector Intended multiplier effect to develop more rural transfer) – Projects ready for auction under the PPP Scheme: infrastructure projects  Primarily to support basic – Toll roads projects such as Balikpapan-Samarinda and Manado-Bitung  Key focus areas: infrastructure projects: – Railway projects such as an express line into Soekarno-Hatta – Infrastructure and maritime development – Food security: International Airport – Transportation and connectivity Irrigation, dams etc. – Water supply projects such as the West Semarang Project – Food security  Various government support for PPP: – Maritime: Seaports,  Medium term infrastructure developments to – Project Development Facility (PDF): Helps Government focus on: shipyards etc. Contracting Agencies (GCAs) in project preparation and – Connectivity: Village transaction – Water Supply roads, public – Viability Gap Fund: improves financial viability of PPP projects – Airports transportation etc. – Government Guarantees: Supports PPP projects’ bankability by – Seaports providing sovereign guarantees – Electricity and power plants – Infrastructure Financing Fund: Provided through PT SMI and IIGF – Housing – Availability Payment (AP): GCA pays private partner based of availability – Mining of infrastructure services Note: OBC: Outline Business Case; PDF: Project Development Facility; GCA: Government Contracting Activity Source : Ministry of Finance; Bappenas; KPPIP: “Komite Kebijakan Percepatan Penyediaan Infrastruktur” or National Committee for the Acceleration of Infrastructure Delivery

104 Government Guarantee For Basic Infrastructure Development Reflects strong commitment to national development planning

Government Guarantee Program Contingent Liabilities from Government Guarantees

 Power (Electricity) – Full credit guarantee for PLN’s debt payment obligation under FTP 1 Exposure/ 10,000 MW and 35GW No. Central Government Guarantee for Infrastructure Programs Outstanding (USD bn)  Celan Water – Guarantee for 70% of PDAM’s debt principal payment obligations 1 Coal Power Plant 10,000 MW Fast Track Program (FTP 1) 2.49  Infrastructure - Full credit guarantee on SOE’s 2 Clean Water Supply Program 0.01 borrowing from international financial institution Credit & guarantee for PT SMI’s local infrastructure 3 Direct Lending from International Financial Institution to SOEs 0.56 Guarantee financing 4 Sumatra Toll Road 0.48  Toll road – Full credit guarantee for PT Hutama Karya’s debt payment obligation (Sumatra Toll Renewable energy, Coals & Gas Power Plant 10,000 MW (FTP 5 1.59 Road Development) 2)  Public Transportation (Light Rail Transit) – Full 6 Public-Private Partnerships (PPP) 1.42 credit guarantee for PT Kereta Api Indonesia’s debt payment obligations for the development of 7 Regional Infrastructure Financing 0.09 LRT Jabodebek 8 Light Rail Transit (LRT) Jakarta Bogor Depok Bekasi -  Power (Electricity) – Guarantee for PT PLN’s Business Viability obligations under Power Purchase Agreements Total 6.63 Guarantee (BVG) with IPPs (off-take and political risk) under FTP-2 As of end of March 2018; currency conversion of IDR 13,756/USD1 (March 29, 2018) 10.000MW and 35GW programs*  From 2008 to Q1-2018, the Government has issued 75 guarantee documents  Infrastructure – Guarantee for Government-related with total value of USD28.84 billion, 5 of which (worth USD0.05 billion) have PPP entities obligations (line ministries, local expired. Guarantee governments, SOEs, local SOEs) under PPP  The Maximum Guarantee Limit for the period 2018 – 2021 is set at 6% of GDP. contracts/agreements  The space for guarantee issuance for the period 2018-2021 is approximately IDR 1,200 trillion (cumulative).  Infrastructure – Guarantee against infrastructure Political Risk risks for National Strategic Projects (Presidential Guarantee Decree No.58/2017) which are not covered by other type of guarantees

*) MOF provides both credit guarantees and BVGs for 35GW program Source: Ministry of Finance 105 Government Financial Facilities for PPP Projects

Financial Facilities to Attract More Private Participation More Funding Schemes are on the Pipelines

Project Financing funded by the private sector through the granting of concessions for an operating asset owned by the Viability Gap Fund Project Development Government/SOE (based on the policy of the (VGF) Facility (PDF) LCS (Limited Government) to the private sector to be operated & managed. Concession Scheme) Scheme Characteristics

• Asset is owned by public sector • Operating asset, not greenfield project Government Guarantees • Records positive cash flow for the last (directly by MoF or through IIGF) several years • Predicted revenue

Project Financing funded by any source of funds other than Government’s budget, e.g. PINA long term management funds (insurance, Availability Payment Financing from repatriated funds from tax amnesty, pension Schemes PT. SMI and PT. IIF (Non-Government funds, etc.), private equity investors and Budget infrastructure funds. Supported & facilitated by Infrastructure National Development Planning Financing) Ministry/Bappenas.

Those financial facilities were instrumental in supporting the execution of Scheme Characteristics PPP projects, indicated by the signing of financial close of the following PPP projects: • Asset is owned by private sector • Greenfield / brownfield / operating projects

Source: Ministry of Finance

106 Progress of PPP Infrastructure Projects

Successful Projects Reaching Financial Close in 2016 and 2017

Project Cost No Project Name Financial Facilities Status (IDR tn) 1 Central Java Power Plant 40 Guarantee (MoF & IIGF) FC on June 6th, 2016; Construction 30%; COD Target: May 2020 2 Palapa Ring – West Package 1.28 PDF, IIGF Guarantee & AP FC on August 11th, 2016; COD target: February 2018 3 Palapa Ring – Central Package 1.38 PDF, IIGF Guarantee & AP FC on September 29th, 2016; COD target: March 2018 4 Palapa Ring – East Package 5.13 PDF, IIGF Guarantee & AP FC on March 29th, 2017; COD target: September 2018 5 Umbulan Water 2.1 PDF, VGF & IIGF Guarantee FC on August 30th, 2016; COD target: July 2019

Signed PPP Projects in 2016 and 2017

Project Cost No Project Name Financial Facilities Status (IDR tn) 1 Batang–Semarang Toll Road 11 IIGF Guarantee PPP & guarantee contracts signed on April 27th, 2016 2 Manado–Bitung Toll Road 5.1 IIGF Guarantee PPP & guarantee contracts signed on June 8th, 2016 3 Samarinda–Balikpapan Toll Road 9.9 IIGF Guarantee PPP & guarantee contracts signed on June 8th, 2016 4 Pandaan–Malang Toll Road 5.9 IIGF Guarantee PPP & guarantee contracts signed on June 8th, 2016 5 Serpong–Balaraja Toll Road 6.0 - PPP contracts signed on June 8th, 2016 6 Jakarta–Cikampek Elevated Toll Road 14.8 Co guarantee (MoF & IIGF) PPP & guarantee contracts both signed on December 5th, 2016 and February 22nd, 2017 7 Krian–Legundi-Krian Toll Road 9.0 Co guarantee (MoF & IIGF) PPP & guarantee contracts both signed on December 5th, 2016 and February 22nd, 2017 8 Serang–Panimbang Toll Road 5.3 Co guarantee (MoF & IIGF) PPP & guarantee contracts signed on February 22nd, 2017 9 Cileunyi–Sumedang-Dawuan Toll 8.2 Co guarantee (MoF & IIGF) PPP & guarantee contracts signed on February 22nd, 2017 Road

Source: Ministry of Finance, as of July 2017 107 New Guarantee Schemes for Non-PPP Projects

Guarantee on SOE Direct Lending from International Financial Institutions (IFIs)

The Government had issued Presidential Regulation No 82/2015 and Ministry of Finance Regulation No 189/2015 to provide guarantee for SOE Direct Lending from IFIs for the Development of Infrastructure Projects.

The objective of this guarantee is to provide credit enhancement in terms of low interest rate and long tenor financing, with 3 main principles:

Best practice of fiscal risk State finance soundness Fiscal sustainabiliy management

Guarantee for Regional Infrastructure Financing Provision

The objective is to give stimulus to The Government had issued the acceleration of local Based on Government Regulation Ministry of Finance Regulation No infrastructure development through No. 95/2015 and Ministry of 174 of 2016 to provide guarantee the ease of access to infrastructure Finance Regulation No. 232/2015, to PT SMI on the assignment of financing and to boost local Minister of Finance assigns PT SMI regional infrastructure financing (Sarana Multi Infrastruktur) to carry economic growth, as well as to provision, by loan to local out functions in providing loan to provide alternative financing governments that is transferred local government, as previously schemes in order to meet local from PIP to PT SMI, and new loan carried out by PIP (Government infrastructure development needs channeled by PT SMI to the local Investment Center). government. and to reduce reliance on state/local budget.

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