Economic and Financial Highlights February-March 2006

Summary:

Ø Indonesia’s consumer price inflation slowed in March 2006 to 15.74% year-on-year (YoY) after a higher than expected 17.92 YoY increase in February.

Ø Some analysts believe the decline may be the start of a downward trend following four months of high YoY inflation rates after the October 2005 fuel price hikes.

Ø Bank Indonesia (BI) left interest rates unchanged at 12.75% at both its March 7 and April 5 monetary policy meetings, but indicated it may start cutting rates in May 2006 depending on the inflation picture.

Ø Indonesia issued USD 2 billion in dollar-denominated global bonds on March 2.

Ø The GOI swapped a total of Rp 16.1 trillion (USD 1.8 billion) of variable and fixed rate bonds in March 2006 as part of an ongoing effort to reduce short-term debt amortizations.

Ø State-owned Bank Mandiri, Indonesia's largest lender by asset value, released its 2005 financial statement on March 21 showing an increase in non-performing loans (NPLs) to 25.3% of total loans.

Ø The Central Bureau of Statistics (BPS) released data on February 15 showing that Indonesia’s economy grew 5.6% in 2005, an improvement over 2004’s growth of 5.1%.

Ø Growth in the fourth quarter of 2005 at 4.9% YoY was stronger than expected, although significantly lower than the third quarter’s 5.6% YoY growth.

Ø The international rating agency Standard and Poor’s upgraded Indonesia’s sovereign rating outlook from stable to positive on February 10, and Moody’s put Indonesia under review for a possible upgrade on February 27.

Ø Fitch was the contrarian, downgrading Indonesia’s sovereign credit rating
outlook from positive to stable.

On April 3, BPS released data showing Indonesia’s March consumer price inflation slowed to 15.74% YoY. The month-on-month (MoM) increase was only 0.03%, the lowest in two years. Some analysts see this as the beginning of an expected downward trend in inflation after the October 2005 fuel price hikes. The modest CPI increases in March were in contrast to February 2006, when inflation was higher than expected at 17.92% YoY and 0.58% MoM. BPS Chairman Choiril Maksum noted that food price increases were the main driver of the CPI increase in February due to a late start of the harvest season. In March, however, food prices fell as the harvest season got underway.

CPI Components

BI kept its maximum 30-day Bank Indonesia Certificate (SBI) reference rate steady at 12.75% for the fourth month in a row at its April 5 and March 7 monetary policy board meetings, as expected. On April 11, the media quoted senior BI officials as stating that the bank may begin lowering interest rates in May, earlier than expected, if inflation continues to decline. BI also left the overnight FASBI rate unchanged at 7.75% and the seven-day FASBI rate at 10.75% on April 5.

On March 2, the Ministry of Finance (MOF) issued USD 2 billion of dollar-denominated global bonds, Indonesia’s largest ever global bond offering. The bonds include USD 1 billion in ten-year bonds maturing in 2017 (INDO 17) yielding seven percent, and USD 1 billion of INDO 35 maturing in 2035 yielding 7.375%. The bonds were rated B2 (positive) by Moody’s and B plus (positive) by Standard and Poor’s.

The GOI swapped a total of Rp 16.1 trillion (USD 1.8 billion) worth of bonds in two March 2006 auctions. On March 2, the GOI swapped Rp 7.6 trillion (USD 834 million) of variable-rate bonds with average weighted yields between 12.85 and 13.19% with new 15-year, fixed-rate bonds, carrying a 12.8% coupon rate. In a similar auction on March 23, the GOI swapped Rp 8.5 trillion (USD 938 million) of fixed- and variable-rate bonds with average weighted yields of between 11.77% and 13.19% for new five-year, fixed-rate bonds carrying a 12.12% coupon. The Ministry of Finance's Director General of Treasury, Mulia Nasution, said he plans to hold bond-swap auctions at least once a month in the remainder of 2006. The GOI has been re-profiling its debt for several years through a series of maturity-extending swaps and buybacks to reduce an estimated Rp 40 trillion (USD 4.4 billion) in 2007-09 amortizations. The government plans to raise Rp 24.9 trillion (USD 2.7 billion) in net proceeds from bond sales in 2006.

State-owned Bank Mandiri, the country's largest bank by asset value, released its 2005 financial statement on March 21 showing a large increase in non-performing loans (NPLs). Mandiri's gross NPLs as of December 2005 were 25.3% of total loans, up from 7.1% for the same period in 2004. As of September 2005, the equivalent figures for Indonesia’s second largest bank, Bank Negara Indonesia (BNI) were 14.4%, up from 6.1% for the same period in 2004, well above the BI-recommended maximum of five percent. The two banks’ NPL problems stem from a stricter reclassification of loans (due to the implementation of BI regulation No. 7/2/PBI/2005 in July 2005) as well the deterioration in quality of a number of large corporate loans. Mandiri’s share price and corporate rating both fell after the announcement. The two state-owned banks account for approximately 27% of banking sector assets as of September 2005.

7. BI Deputy Governor Siti C. Fadjrijah said during a hearing with legislators in late March that the banking sector's average gross NPL ratio as of September 2005 had risen to 8.3%, compared with only 4.8% if Mandiri and BNI were excluded. GOI and bank officials are seeking ways to resolve the NPL problem including by creating a possible “special purpose vehicle” to take the problem loans of the balance sheets of the two banks. The Coordinating Ministry for Economic Affairs has indicated it will issue a new financial sector policy package in May 2006 that will likely address the NPL problems at the two banks.

On February 15, BPS released data showing GDP growth in 2005 reached 5.6%, an improvement over 2004’s growth of 5.1%. However, an estimated 0.2% of the gain is attributable to a “base effect” after BPS revised downward 2004 GDP figures (making the 2005 YoY increases larger). Taking into account the base effect, 2005 growth may be closer to 5.4 rather than 5.6%. Coordinating Minister for the Economy Boediono said that the government still aims to achieve GDP growth of 6 to 7% in the medium term. "I would say that compared to our neighbors, we did quite well given the difficulties we faced last year."

Consumption has been the main driver of growth in recent years and accounted for 65% of GDP by expenditure category in 2005. Household consumption grew four percent YoY in 2005, down slightly from 4.9% in 2004. Government expenditure rose 8.1% (up sharply from two percent growth in 2004); exports rose 8.6% (up from 8.5% in 2004); and investment, despite a weak fourth quarter, rose a healthy 9.9%. Higher investment demand helped push imports up 12.3%, although this figure was lower than the more rapid growth of 25% in 2004.

Indonesian 2005 Real GDP Growth: Full Year

BPS also announced on February 15 that growth in the fourth quarter of 2005 had been stronger than expected at 4.9% YoY. However, growth for the quarter declined from the 5.3% YoY level in the third quarter, as higher fuel prices, higher inflation, and higher interest rates slowed consumer spending. The GOI’s payment of Rp 300,000 (USD 33) of compensation funds to each of the 15 million poorest households in the last quarter of 2005 helped to cushion the impact on household consumption. The compensation payments are scheduled to continue through at least the first three quarters of 2006. Private consumption rose 4.2% YoY in the fourth quarter, a slight decrease from the 4.4% YoY growth in the third quarter. In quarter-on-quarter terms, growth slowed to 1.1% from 1.7%. An increase in net exports boosted fourth quarter GDP growth as imports slowed by 3.4% from third quarter levels in response to the GOI’s October 1, 2005 fuel price hikes. Gross exports remained robust, rising 7.4% YoY and 2.5% quarter-on-quarter (QoQ). A sharp rise in government expenditures, which rose 30% YoY and 33.2% QoQ, also supported growth in the quarter. Gross fixed capital investment was the outlier, contracting by 4.8% from third quarter levels.

On February 9, ratings agency Standard and Poor's revised its outlook on Indonesia's sovereign credit rating to positive from stable, citing improved fiscal and monetary policies and increased investor confidence. After changing its outlook on Indonesia's foreign and local currency ratings to positive from stable on February 18, Moody's Investors Service said on February 27 it had placed Indonesia on review for possible upgrade in light of continued, steady improvement in GOI finances. The Fitch ratings agency, however, was the contrarian, downgrading Indonesia’s sovereign credit rating outlook to stable from positive.

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