RECENT FINANCE & DEVELOPMENT REPORTS

INDONESIA: ECONOMIC AND FINANCIAL  HIGHLIGHTS 
AUGUST - SEPTEMBER  2006

An exchange rate of 9,070 per USD is used throughout this report.

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GDP Growth Picks Up in the Second Quarter

On August 14, the Central Bureau of Statistics (BPS) announced that Indonesia’s economy grew by 5.2% YoY in the second quarter of 2006, compared with a 4.6% gain in the first quarter.  An acceleration in agriculture (5% YoY), mining (5.4%) and construction (8.3%) drove growth in the quarter, while manufacturing was largely flat at just over 3% YoY.  Government spending surged during the second quarter by 31.5% YoY, following a 14.2% rise in the first quarter YoY.  Nevertheless, government expenditure remained lower than targeted in the first half of the year.  Private consumption growth eased slightly to 3% from 3.2% in the January-March quarter.  Indonesia’s exports rose by 11.3% in the second quarter compared with a 10.8% gain in the previous quarter.  This was partially offset by a pick-up in import growth, to 8.3% in the second quarter.  Investment growth was negative for the first time in two-and-a-half years, by -1% YoY, likely due to high interest rates.

Indonesian YoY Real GDP Growth:

Source: Central Bureau of Statistics (BPS)

Inflation Eases Further in August

On October 2, the Central Bureau of Statistics (BPS) announced that Indonesia’s month-on-month (MoM) inflation increased slightly to 0.38% in September with the beginning of the Muslim fasting month compared with 0.33% in August.  However, YoY inflation for the month eased for a fourth consecutive month to 14.55%, the lowest reading in a year.  All components of the consumer price index except foodstuffs and education demonstrated slower price growth in September compared to August.  Core inflation went up by 0.35% MoM, and 9.13% YoY in September, compared to August’s 0.78% and 9.68% respectively.  Though demand for goods and transportation traditionally increases due to Muslim and Christian holidays in the fourth quarter, analysts remain optimistic that YoY inflation will fall to 7% by the end of 2006.

CPI Components

Source: Central Bureau of Statistics (BPS)

* Core inflation is a measure of inflation which excludes certain items that
 face volatile price movements i.e. energy, food products.

 Interest Rate Cut to 10.75%

 At its monetary policy meeting on October 5, BI cut its policy rate 50 basis points to 10.75% on top of a previous 50 basis points cut on September 5.  Markets expect interest rates to continue to fall during the remainder of 2006 as inflationary pressures subside.  The Director of the Office of the Governor at BI said there is room for more interest rate cuts later this year due to an expected further easing in inflation.  

GOI Issues Long-Term Bonds

  The Government of Indonesia (GOI) completed its rupiah bond offerings for 2006 with bond auctions on August 22, September 19, and October 10 that raised a total of Rp 9.5 trillion (USD 1 billion) for the budget.  The three auctions brought the total amount of government bonds issued this year to approximately Rp 60.9 trillion (US $6.6 billion), with a net issuance (new issues minus amortizations) of Rp 35.8 trillion (US $3.9 billion).  Details on the three auctions follow: 

·        On August 22, the Ministry of Finance (MOF) issued Rp 1.95 trillion (US $212 million) of 12-year bonds and Rp 4.175 trillion (US $454 million) of 17-year bonds.  The bonds of% and 11.95% average yield, respectively. 

·        On September 19, MOF sold rupiah-denominated Government Bonds with an overall value of Rp 2.4 trillion (US $261 million).  The bonds offer a fixed rate with an 11% semi-annual coupon, maturing in 2025. 

·        On October 10, MOF held its last bond auction for 2006 by selling Rp 1 trillion (US $109 million).  The bond holds 9.25% coupon rate and will mature on in 2008. 
          

GOI Continues Debt Swap Program  

An August 8 MOF offer to swap Rp 4.4 trillion (US $478.5 million) worth of bonds maturing 2007-2009 for 15-year debt drew a good response, after Bank Indonesia slashed its benchmark rate by half a percentage point.  The 15-year bonds were priced to yield 12.03%, significantly below a the 12.41% yield for 15-year bonds auctioned on July 25, reflecting strong demand.  Subsequent debt swaps on August 29 and September 26 were less successful, with the GOI exchanging only a small amount of bonds. 

Indonesia and Germany Agree On Debt Swap

On August 3, Germany and Indonesia agreed on a EUR 12.5 million (USD 16 million) debt-for-environment swap under which the GOI committed to spend approximately Rp 60 billion (US $7 million) to establish a revolving fund for investment in environment-friendly technology.  Selected Indonesian banks will administer the fund and channel it into micro and small enterprises, especially those facing difficulties in obtaining bank loans.  In return, Germany will cancel outstanding debts amounting to twice the sum spent by Indonesian government.  Germany will also provide EUR 10 million (US $12.8 million) to build a hospital in South Sulawesi province.  EUR 1 million (US $1.3 million) of this assistance is in grant form, with the rest in the form of a loan carrying a 0.75% interest rate with 10-year grace period.

New Regulations for Mutual Funds, Insurance Companies

As part of the government’s financial sector reform policy package (Ref A), the Financial Institution and Capital Markets Supervisory Board (BAPEPAM-LK) issued three new regulations concerning mutual fund sales agents on August 31.  The regulations seek to improve the professionalism of mutual fund sales agents and representatives by requiring a licensing, examination and registration system.     

On August 31, BAPEPAM-LK also issued a decree on insolvent insurance companies outlining the GOI’s strategy for managing insolvent insurance and reinsurance companies.  The decree contains a) sanctions for companies that do not meet solvency requirements; b) procedures for submission of insurance company restructuring plans to the MOF’s Insurance Bureau and; c) requirements during the restructuring transition period.  Observers have noted that some of Indonesia’s small domestic insurers are in poor financial condition and may need closer supervision.     

State Banks Can Write Down NPLs

On October 1, Coordinating Minister for the Economy Boediono said that President Susilo Bambang Yudhoyono had amended Government Regulation No. 14/2005 on the procedures for treating debts to state-owned institutions.  The new decree reportedly will allow state banks to write-off bad loans independently without a lengthy approval process requiring the assent of the MOF, the President and the Parliament (depending on the size of the debt).  State bank loans will no longer be treated as state assets.  This will allow state banks discretion similar to private banks in restructuring, re-negotiating and writing down non-performing loans.  The amendment is part of the GOI’s July 2006 financial sector reform package. 

GOI Divests Shares in Bank Permata

Konsortium of PT Astra International and Standard Chartered Bank acquired a 25.9 percent stake in Bank Permata from the state asset management company PT Perusahaan Pengelola Aset (PPA) on September 6 for (Rp 1.8 trillion (USD 197 million).  PPA sold Bank Permata at a price of Rp 875 per share.  The final transaction price values the banks at 2.64 times PBV based on December 31, 2005 financial statement.  The acquisition increases the consortium’s stake in Permata from 63.1% to 89%. Under the terms of the consortium agreement, SCB and Astra each own 44.5% of Permata.  Permata is Indonesia’s seventh largest bank by assets and has more than 310 branches, a million customers and total assets of Rp 36.6 trillion (US $4 billion) as of June 2006.

Remaining GOI Shares in Banks

Source: PPA

Mandiri’s Big Debtors Start Repaying

On August 31, state-owned Bank Mandiri announced that a number of its biggest debtors have committed to speeding up repayment of their loans.  In June 2006, the bank had publicized the names of 30 corporate borrowers with non-performing loans exceeding Rp 1 trillion each (US $109 million).  The total loans to this group accounted for 60% of Mandiri’s NPLs, which reached Rp 27 trillion (US $2.9 billion) as of December 2005, or 26.2% of its total loans.  The table below shows the status of some of the big debtors.

Mandiri’s Debt Settlement Status

Source: Bank Mandiri

(1)   As of March 2006, in Rp billion unless stated otherwise.

(2)   Management consulting services.

(3-7) Chemical manufacturer

(8-9) Textile manufacturer

(10)  Fish trading company

Parliament Approves Capital Injection for State-Owned Airlines

At a September 12 hearing, Parliament approved Rp 1 trillion (US $109 million) and Rp 450 billion (US $49 million) capital injections for state owned airline companies Garuda Indonesia and Merpati Nusantara, respectively.  According to the budget committee chairman Max Moein, the capital injection will be obtained from privatization proceeds this year, targeted at Rp 3.2 trillion (US $348 million).  Garuda will receive Rp 500 billion (US $54 million) in 2006 and the remaining Rp 500 billion in 2007.  Moein also added that Minister for State-Owned Enterprises Sugiharto should facilitate loan repayment by Garuda to state-owned oil company Pertamina.  Separately, Ministry for SOE’s Secretary General Said Didu reportedly said that Garuda actually needs US $230 million to complete its restructuring.

Selected Economic, Monetary  & Financial Statistics

 Source: Bank Indonesia, BPS

(1)   Rp/USD, end of period

(2)   End of period

(3)   USD billions, end of period

(4)   Jakarta Stock Exchange average daily transaction volume, in billions of shares

(5)   USD billions

* * *

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