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Dear Reader,

Below are my notes for an important event in NY that will be a bellwether for the Indonesia's economy going forward. I invite you to explore membership in AICC both to enhance your company's business with Indonesia but also to support the many programs we are engaged in to improve the overall commercial relationship between our two countries. Please contact me at any time for information or confidential counsel about Indonesia and your activities there.
 
Wayne Forrest
President

 

��Indonesia Financial Sector Update�- 4/24/2006

Amid the highest gains in the rupiah and Jakarta Stock Exchange in over 5 years, 150 financial investors and other professionals heard Indonesia�s fiscal and monetary policy leaders, Minister of Finance Sri Mulyani Indrawati and Bank Indonesia Governor Burhanuddin Abdullah describe their various policy approaches to rising world interest rates, higher energy prices, national budget, financial sector reform and competition for investment.

Minister Mulyani spoke first and her remarks were highlighted by a comment that the government is readying a financial sector reform package that will be announced shortly. She also announced key changes at the Director General level (tax and customs) in her ministry.

Fresh from annual IMF/World Bank meetings, the two demonstrated the newfound independence of the central bank from the Finance Ministry, although it was clear from some of their statements that there is a little more to be done in this area. Anggito Abimanju, a key member of the Ministry�s brain trust assisted with the presentation and replies to technical questions. The Minister thanked the many bond holders in the audience for their confidence in the Indonesian economy.� She described the economic team as extremely unified and made the point that including Boediono, the Coordinating Minister of Economic Affairs, there are two finance ministers in the Cabinet

Corporate Hosts were: Barclays Capital, JP Morgan, and UBS

The following are notes of their presentations and responses to questions.� The Minister�s power point presentation, including several helpful statistical slides, is available for download at AICC�s website: www.aiccusa.org/documents.htm

 Economic Highlights 

bulletGDP growth reached 5.6% in 2005 despite higher energy prices and tsunami shock. 2006 quarter one growth only 4.5-5% but should pick up in later quarters as investment and exports increase.
bulletGrowth pattern depending more on exports and investment than consumption, slowed by inflationary pressures.
bulletStronger rupiah of past 6 months attributed to tighter monetary policy of Bank Indonesia which raised interest rates three times to 12.75% following last summer�s oil price hike.� BI expects to keep this rate and could lower it depending on how the government�s reform program is implemented and how it sees environment for inflation.
bulletCurrent account surplus is �robust�, and reserves equal to four months of imports.
bulletTrade balance relatively stable despite 2005 volatility in exchange rates and double digit inflation.
bulletImports of capital equipment jumped in 2005.
bulletBanking sector continues to improve.� Healthy CAR average of over 20%.� Non Performing Loans increasing due to new central bank regulations. Number of banks decreased

Fiscal Policy

bulletCommitment to fiscal prudence evidenced by declining budget deficit (less than 1% of GDP). Measures include: tax and customs reforms, streamline expenditures and fuel subsidy cuts, good access to international credit markets.
bulletFiscal risks are: global interest rates, oil prices, and performance of state-owned enterprises.�� Although capital markets have been generous to Indonesia, Indonesia will maintain fiscal prudence.
bulletDeficit spending will increase in 2006 due to carry over spending from 2005 and spending on infrastructure.� New budget law and accounting systems slowed 2005 spending.�

Monetary Policy

bulletGovernment is positive on currency appreciation
bulletIslamic banking is encouraged
bulletMaintain 12.5% interest rates (tight) until growth is assured at 5.6-5.8 %
bulletMarket forces have led to currency appreciation not any international or US pressure.� Indonesia maintains a floating exchange rate policy.

Tax and Customs Reform

bulletModernizations will include online filing, improve large payer�s office, extend priority lane facility, fight smuggling and illegal goods.
bulletProposed tax and custom law will provide more legal certainty and balance between taxpayers and officials.
bulletBusiness community and government have agreed on new changes to tax law amendment to be submitted to Parliament.�
bulletChanges will make greater use of technology to minimize interaction between tax payers and officials, new codes of conduct for officials, as well as tax incentives for business.
bulletIn her recent trip, the Minister asked IRS for technical assistance in implementing changes to tax administration.
bulletOther strong signs of tax reform: the Minister recently appointed a new Director General of Taxation, Darmin Nasution (now President of the Jakarta Stock Exchange) and DG for Customs, Anwar Suprijadi; the President has asked former senior officials with clean reputations to help in reforming the tax office: Ma�rie Muhammad and Marsilam Simandjuntak.
bulletA simple customs window for all of ASEAN has been established by awaits the ratification of one member country.
bulletOther e-governments innovations that are almost ready to go are: public works e-procurement, e-customs.

Debt Management

bulletDebt to GDP steadily declining from 84% in 2000 to 43% now.
bulletContinued use of swaps, improving maturity profiles and lower borrowing costs are primary factors in improved debt management.
bulletProfile of government bond holders has improved with a rising ownership share among �long term� holders: insurance, foreign, and pension funds.
bulletSome old debt could be repaid by 2008.

Investment Climate

bulletReforms will be pushed in areas of business start-up, taxes and customs, trade restrictions and decentralization in the year ahead
bulletRegistration and licenses approval times will be reduced, tax and customs refunds will be speeded up, clearance times reduced, and fiscal balance between national and regional governments will be achieved.

Outlook and Policy Agenda for 2006

bulletGlobal risk is upward pressure on oil prices and interest rates.
bulletGrowth will come from fiscal stimulus (infrastructure spending), investment and exports
bulletMacro-stability maintained by controlling inflation and fiscal-monetary policy coordination.
bulletInvestment climate improvement will come through infrastructure spending(forthcoming), investment climate package (announced in February) and financial sector package (forthcoming)
bulletHigh priority: tax and customs reforms