k Fhm 18424279

OFFICE OF CHIEF ECONOMIST May 2010

National Electricity Consumption

(GWh)

105987111402

119969127637

133120

0

20000

40000

60000

80000

100000

120000

140000

160000

2005 2006 2007 2008 2009

-1000

19000

39000

59000

79000

99000

Total (RHS) Social Institutional (LHS) Household (LHS)

Industrial (LHS) Business (LHS) Public (LHS)

1234

IInnddoonneessiiaa UUppddaattee

European Sovereign Risk

In the beginning of this year, investors began to observe the unusually high and vulnerable

fiscal indicator. People are beginning to see fiscal indicators reaching the level of discomfort in

many countries (fiscal deficit and government debt to GDP ratio exceeding 3% and 60%

respectively). Investors are starting to digest the numbers and anxiety is growing. Greece has

been the first to suffer from market nervousness in the beginning of this year. From domestic perspective, the fiscal crisis in Europe has yet to take its toll. Thus far, market

confidence remains intact, shocks have not caused severe correction. Indonesia has been

implementing a conservative fiscal policy. Government deficit has been maintained at a level

not to exceed 3%, and the debt to GDP ratio has been sharply reduced to just below 30%. The

refinancing risk is quite well distributed In this regards, it seems reasonable for Indonesia to take precautious action. A major

weakness spot is the significant foreign portfolio investment exposure in SBI. Authorities could

either try to reduce the threat by putting control measures into place, or reduce domestic

attractiveness by cutting benchmark rate. Fertilizer Industry in Indonesia

Fertilizer is one of the vital agricultural production facilities in the context of endeavors for

promoting food security program and improving the national plantation sector. The current issue under discussion will be limited specifically to the chemical fertilizer industry,

bearing in mind its dominant position compared to organic fertilizer. To date, chemical

fertilizer consumption has reached 8 million tons, while organic fertilizer consumption ranges

only about 1 to 2 million tons. Impact of Electricity Tariff Increase: A DyRec-CGE Analysis

We analyze the potential impact of electricity tariff (TDL) increase on Indonesia’s economy,

from the aspects of macro, sectoral and regional economy. The plan for TDL increase by 10.0%

in July 2010 will have a potentially negative impact on economic growth.

In the aggregate, output will drop due to the increase of the companies’ cost of production

and decrease in supply. Inflation will rise by 0.27%. TDL increase will also lead to a decrease in

the industrial sector output. Furthermore, provinces with high level of electricity consumption

will be under pressure.

CCoonntteennttss

Fear Factor 2010: European

Sovereign Risk

p. 02

Fertilizer Industry in Indonesia:

Raw Materials continue to be the

Main Obstacle

p. 18

Impact of Electricity Tariff

Increase: A DyRec-CGE Analysis

p. 28

Mandiri Current Forecast p. 42

Indonesia Current Data (Table) p. 43

CChhiieeff EEccoonnoommiisstt

Mirza Adityaswara

[email protected]

AAnnaallyysstt

Moch. Doddy Ariefianto

Faisal Rino Bernando

Nina Anggraeni

Rini Setyowati

M. Ajie Maulendra

Nadia Kusuma Dewi

Nurul Yuniataqwa Karunia

Sindi Paramita

Reny Eka Putri

PPuubblliiccaattiioonn AAddddrreessss::

Bank Mandiri Head Office

Office of Chief Economist

21st

Floor, Plaza Mandiri

Jalan Gatot Subroto Kav.36-38

Jakarta 12190, Indonesia

Phone: (62-21) 5245516 / 5272

Fax: (62-21) 5210430

EEmmaaiill::

[email protected]

[email protected]

[email protected]

[email protected]

[email protected]

[email protected]

[email protected]

[email protected]

[email protected]

SSeeee iimmppoorrttaanntt ddiissccllaaiimmeerr aatt tthhee eenndd ooff

tthhiiss mmaatteerriiaall

© Office of Chief Economist Page 2 of 44

The sharp global recovery we have observed recently has

come with a huge cost. The massive economic stimulus

unveiled during the 2008-2009 recession has caused many

countries (especially the developed ones) to run a large fiscal

deficit, consequently accumulating government debt.

People are beginning to see fiscal indicators reaching the level

of discomfort (fiscal deficit and government debt to GDP ratio

exceeding 3% and 60% respectively) in many countries.

Investors are starting to digest the numbers and anxiety is

growing. Greece has been the first to suffer from market

nervousness in the beginning of this year.

In this article, we shall try to give an overview of the problem,

both in terms of its size and complexity, as well as its

implication to Indonesia. The current state of the global

economy leaves any country with a higher degree of

vulnerability to external shock than in previous decades.

Distance and relationships do not seem to really matter any

longer.

Recent Snapshot of the Global Economy: Multi Speed

Recovery

Economic recovery is progressing stronger than expected. A

year ago many market players expected that the downturn

would last for an estimated 2-3 years. The financial crisis has

reduced the capital of many major banks and has substantially

impaired their intermediary function. Due to diminished

confidence and stricter rule, the banks’ capital was predicted

to improve sluggishly.

However, this opinion has proven to be quite inaccurate.

Thanks to liberal government intervention (both through

monetary and fiscal channels), the diminished purchasing

power of the private sector has been offset significantly. The

orchestrated efforts of many countries have been finally able

to revive market confidence and the real sectors are observed

to begin traction.

Fear Factor 2010: European Sovereign Risk Moch. Doddy Ariefianto ([email protected])

Economic recovery

is progressing

stronger than

expected…


The outlook has been upgraded multiple times by many

influential watchers. Currently, IMF looks to 4.2% annual

world growth in 2010 compared to 3.9% in January and 3.1%

in the October Report. This marks a sharp turn over from 0.6%

global output decline in 2009. The pick-up in trade, robust

growth in emerging countries and regained risk appetite have

been the main driving force behind this stellar performance

(see figure 1).

The speeds of recovery are varied. Major industrial countries

are expected to have their economies to expand by a modest

level (around 1%). On the other hand, developing economies

are likely to have their growth level close to normal.

The wide disparity of growth has been mainly due to the

disproportionate nature of crisis impact. The global downturn

was triggered by sub-prime mortgage that has inflicted a

much greater loss to financial institutions in developed

countries than in emerging economies (see figure 2). The cost

of credit write down reached USD1.740 billion for U.S. and

European financial institutions, more than 42 times compared

to that of Asian financial institutions.

The wide disparity

of growth has been

mainly due to the

disproportionate

nature of crisis

impact

Figure 1. Outlook of the Global Economy. World recovery proceeds stronger than expected.

However, the speeds are quite varied. Growth in developed countries is significantly below that

in emerging countries (Source: IMF).

2010 2011

World 5.1 -0.8 4.2 4.3

Euro Area 2.7 -3.9 1.0 1.5

UK 2.6 -4.8 1.3 2.5

US 2.0 -2.5 3.1 2.6

Japan 2.3 -5.3 1.9 2.0

China 13.0 8.7 10.0 9.9

India 9.4 5.6 8.0 8.4

ASEAN-5 6.3 1.3 8.0 5.6

April 2010 ForecastArea 2007 2009


Consequently, as private demand is starting to pick up, the

financial sector of emerging economies is quick to respond.

Indeed, even in the depth of the crisis, the financial sector in

most emerging economies has only been experiencing a slow

down, while their counterparts in developed countries have

suffered a substantial contraction (see figure 3).

This wide divergence of economic performance also implies

different policy stance. As inflation is usually tame in a modest

mode of growth, hence we could expect that policy rates are

Figure 2. Global Mortgage Related Credit Write Down. US and European countries are more

exposed to mortgage related credit. Almost 66% global credit write down suffered by US

financial institutions, while European institutions shared around 32%. The figure for Asian

institutions is insignificant. (Source: Bloomberg).

Asia

Europe

US

World

USD billion

1.781

1.174

566

41Asia

Europe

US

World

USD billion

Asia

Europe

US

World

USD billion

1.781

1.174

566

41

Figure 3. Bank Lending Condition. Lending activities fell more sharply in developed countries.

Annual credit growth rates are negative due to contracting capital and diminished confidence.

On the other hand, emerging countries still enjoy positive credit growth albeit in a much smaller

level. (Source: IMF).


likely to hold near record low until considerable time ahead

(see figure 4).

Rather loose policies are preferred since authorities are still

not convinced that the recovery process is robust. Precipitated

tightening and ill measured exit strategy could jeopardize

progress. With unemployment staying at decade high level

(see figure 5), authorities are more willing to accept higher

inflation risk.

… wide divergence of

economic

performance also

implies different

policy stance

Figure 4. Interest Rate Expectation. In line with economic fundamentals, authorities in

developed countries adopt loose monetary stance. Interest rate would likely be maintained at

current low level. First hike would not be commenced until later this year or perhaps early next

year. This contrasted to emerging countries, many which already begin to tighten. (Source:

Bloomberg)

0

0.5

1

1.5

2

2.5

3

3.5

1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11

US Fed

ECB

BOE

BOJ

x

0

2

4

6

8

10

12

14

1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11

RBA China Brazil

India BI Rate

%

Figure 5. Unemployment rate. Unemployment rate would likely persist at higher than normal

level for couple of years especially in developed countries. Enterprises should see the inventory

depleted significantly before they start hiring. (Source: IMF).

4

4.5

5

5.5

6

6.5

7

7.5

8

8.5

9

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

4

4.5

5

5.5

6

6.5

7

7.5Advanced Economies (Lhs)

Emerging Economies (Rhs)

% %


Countries in Distress (The European GIPSI)

In the beginning of this year, investors began to observe the

unusually high and vulnerable fiscal indicator. Due to an

aggressive stance in supporting the economy, authorities are

now running large fiscal deficit and accumulating high debt.

Several countries in Western Europe appear to be facing

difficulties in managing the growing burden. These countries,

namely Greece, Ireland, Portugal, Spain and Italy (the GIPSI

countries), share the common characteristics of debt vicious

circle. These characteristics include (1) poor economic

performance (annual growth around 1% or below), (2) high

fiscal deficit (more than 3% fiscal deficit to GDP ratio) and (3)

high sovereign debt ratio (more than 60% government debt to

GDP ratio).

Poor economic performance decreases tax revenue.

Inadequate revenue would in turn render the Government

unable to reduce the deficit. Sustained deficit would then

make the debt ratio even higher (due to its interest and

refinancing cost). Higher debt would divert necessary

resources from productive activity, thus causing growth to

suffer. The cycle then begins all over again, getting larger with

every turn.

These countries (the

GIPSI) share the

common

characteristics of debt

vicious circle


The market reacted negatively to this increasingly negative

prospect. Prominent rating agencies began to cut their

outlook and credit valuation on these countries (see figure 6).

Greece, whose condition is the worst, has suffered several

downgrades. The latest action by Standard and Poor has been

the most severe. It has cut the country’s credit rating three

notches from BBB+ to BB+ (just above one notch to Indonesia,

BB). Greece’s rating is currently non-investment grade (junk

bond).

Figure 6. Key Timeline of GIPSI Crisis. Market confidence deteriorated fast during the end of

2009 and first quarter of 2010. High level of vulnerability indicators and needs for refinancing

have caused investors to demand substantial premium. The latter then placed troubled countries

in an even more difficult situation. Currently, investors are starting to reckon an even worse

scenario: contagion and default. (Source: Various Sources).

Time Event

October 2009 A new Greek government is formed after the election, led by PASOK, which received

43.92% of the popular vote, and 160 of 300 parliament seats.

November 2009 Final budget draft aims to cut deficit to 8.7% of GDP in 2010. Draft also projects total

debt rising to 121% of GDP in 2010 from 113.4% in 2009.

December 2009 Fitch cuts Greece's rating from A- to BBB+, with a negative outlook which then

subsequently followed by S&P (from A-to BBB+) and Moody's (from A1 to A2).

January 2010 Greece unveiled the Stability and Growth Program which aims to cut deficit from 12.7%

in 2009 to 2.8% in 2012 (austerity measures).

February 2010 Greece implemented a couple of austerity measures which was responded to by a one-

day general strike (Feb, 24) that halted public services and transport system.

EU mission in Athens with IMF experts delivers very negative assessment of the

country's finances.

March 2010 Greece implemented further austerity measures (including wage and public servants

bonus, increased VAT, etc.), which was responded to in the form of another general

strike on March 11.

Papandreou warns Greece will not be able to cut deficit if borrowing costs remain as high

as they are and may have to go to the IMF.

April 2010 EMU leaders agree EUR 30 bn bailout plan for Greece.

Standard and Poor's downgrades Greece's debt ratings from BBB+ to BB+ (below

investment grade or junk bond status).

S&P downgrades Portuguese and Spain debt from A to A- and AAA to AA- respectively

with negative outlook. Moodys and Fitch announced to follow.

May 2010 General strikes on May 4 and May 5 which ended with a riot and 3 casualties.

EMU and IMF announced USD 100 bn bailout package for Greece. Market fell due to

growing speculation that Greece Crisis would spread to other countries.

EMU and IMF announced USD 962 bn emergency fund to defend greater euro.

ECB pledge to counter “severe tensions” in “certain” markets by purchasing government

and private debt.


As a consequence of deteriorating confidence, the countries

concerned are now also facing higher cost of financing. As can

be seen from figure 8, both the Credit Default Swap and Yield

Spread (vs 2 year Germany Sovereign Bond) have risen sharply

since early this year. The cost to insure a Greece Sovereign

Debt is now almost three times larger compared to the

beginning of the year. The Greece government must also pay

more than three times of comparable German Bonds.

This occurrence is of course unfortunate, as the burdens of

countries are now even greater. It is unsurprising then that

they have started to look for alternative sources of financing.

As a consequence of

deteriorating

confidence, the

countries concerned

are now also facing

higher cost of

financing

Figure 7. Selected Macro Economic Indicators of GIPSI Countries. Some European countries

have come into a difficult situation due to high sovereign debt coupled with low fiscal capacity.

These troubling conditions have taken market attention which subsequently started and caused

adverse pricing. (Source: European Commission and IMF).

Budget deficit

2010 (% GDP)

Debt-to-GDP

2010

External debt

(% debt)

Short-term

debt (% GDP)

Current

account 2010

(% GDP)

Greece -12.2 124.9 77.5 20.8 -10.0

Portugal -8.0 84.6 73.8 22.6 -9.9

Ireland -14.7 82.6 57.2 47.3 -1.7

Italy -5.3 116.7 49.0 5.7 -2.5

Spain -10.1 66.3 37.0 5.8 -6.0

UK -12.9 80.3 22.1 3.3 -2.0

US -12.5 93.6 26.4 8.3 -2.6

Figure 8. Credit Default Swap and Yield Spread of GIPSI countries. As an effect of market

discount the news, GIPSI sovereign price jumped to a level never seen before. The most adverse

situation is experienced by Greece which has the most immediate refinancing risk. The storm has

calmed recently due to heavy intervention by the European Union and IMF. (Source: Bloomberg).

0

100

200

300

400

500

600

700

800

900

1000

5/11/09 7/11/09 9/11/09 11/11/09 1/11/10 3/11/10

Greece

Portugal

Ireland

Italy

Spain

0

200

400

600

800

1000

1200

1400

1600

1800

2000

5/11/09 7/11/09 9/11/09 11/11/09 1/11/10 3/11/10

Greece

Portugal

Ireland

Spain

Italy


Though officially the GIPSI countries are members of the

European Union, however it seems that they could not expect

too much relief from their fellow member countries.

The main engine of the European Union: Germany and France

are in no position to provide support. Their economic

condition is not much better, and the political opposition from

the inside is quite great. To bail out a country means to extend

the same facility to others. This would put Germany and

France economies in a more difficult situation.

The problem faced by these countries is highly complex and it

is very doubtful that it could be resolved by their own means.

First, the cost of bail out and of restructuring the debts is

extremely large and would be undoubtedly the highest in

history. The GIPSI need USD1287.5 Billion (see figure 9), to

cover financing during 2010-2012. This huge amount comes

mainly from the need for debt roll over and financing existing

primary deficit.

Second, the financial rescue would be unlikely to come from a

single country or even solely from the European Union. The

most reasonable funding source would be the IMF, although it

would probably not be that easy. IMF has the reputation of

demonstrating a high degree of austerity towards its

“patients”. Democratic countries like the GIPSI would be likely

to face stiff opposition from the public. Indeed, Greece has

suffered a couple of strikes and The Union has threatened a

Figure 9. Financing Needs 2010-2012 of GIPSI Countries. Total bail out for European troubled

countries could reach USD 1287.5bn. This amount comes from debt roll over and financing

existing primary deficit. (Source: Reuters).

12058.5 38

347

724

1287.5

0

200

400

600

800

1000

1200

1400

Greece Portugal Ireland Spain Ita ly Tota l


larger attack should the government continue with its fiscal

stabilization plan.

The substantial political pressure is not surprising. European

countries have long been known to adopt the welfare state

paradigm. This economic thought dictates that the country

should provide maximum welfare to the citizen, even

(possibly) at the cost of a higher tax rate. It comes as no

surprise then that the share of wages and social benefits

account for a substantial portion in the budget. Greece, for

example, has expenditure for wages and social benefits which

accounted for almost 28% of its GDP.

… share of wages

and social benefits

account for a

substantial portion

in the budget.

Figure 11. Simulation of Stabilization Program. To reach the 2007 debt level, GIPSI economies

must initiate very tough austerity measures. These governments must transform themselves

from net spenders to net savers. Even under a reasonable scenario, these countries must run a

surplus budget for 10 years, before such level is reached. (Source: OECD).

Countries

2007 2010 5 Years 10 years 20 Years

Portugal 71 91 5.7 3.1 1.8

Italy 112 127 5.1 3.4 2.5

Ireland 28 81 11.8 5.4 2.2

Greece 104 123 5.4 2.8 1.5

Spain 42 68 6.1 2.9 1.3

Debt To GDP ratio Annual Primary Balance To Reach 2007 Level Debt

To GDP Ratio

Figure 10. The composition of fiscal expenditure. Stabilization programs in GIPSI countries are

complex since most fiscal expenditures go to social benefits and wages which are highly

sensitive. For example, Greece spends 78% of its tax revenue on these posts. Hence it is hardly

surprising the austerity measures have drawn hostile public response. (Source: IMF).


Stabilization will not be easy. As depicted by figure 11, the

GIPSI countries should maintain a budget surplus for at least 5

years for debt to GDP in order to reach the 2007 ratio. Even

under a moderate resolution (10 years stabilization program),

these countries should maintain 3.7% surplus. This is a very

tough measure, indeed, given that the substantial portion of

public expenditures is in the form of aging society related

subsidies.

Contagion & Hazard Transmission

Even though the troubled countries are located in Europe, it

may not be easy to contain the impact of sovereign crisis.

There are at least three channels from which crisis from a

certain region could spread to another. These channels are (1)

the trade channel, (2) financing constraint, and (3) psychology.

As the recent crisis experience has shown the global economy

has become increasingly integrated. The role of the traditional

shock transmission (trade) has diminished. Finance is now

taking the front seat, with influence either directly through

exposures to a troubled area, or sudden risk aversion. By

drawing analogy from banking theory, an economy can also

collapse if it loses investor confidence. There is only a very

thin line between illiquidity and insolvability.

There are three

channels from which

crisis from a certain

region could spread

to another

Figure 12. The Transmission of Crisis. History shows that there are 3 main channels for an

adverse shock in a particular region transmitted to others. The role of the traditional Trade

Channel has diminished recently, while the role of Financing Constraint and Psychology (sudden

risk reversal) has grown as an effect of globalization. (Source :-)

Global Global Global Global

Financial Financial Financial Financial

ShockShockShockShock

Trade

Channel

Financing

Constraint

Psychology

Economic Activity

Global Global Global Global

Financial Financial Financial Financial

ShockShockShockShock

Trade

Channel

Financing

Constraint

Psychology

Economic Activity


Therefore, in order to gauge properly the magnitude of

possible contagion, it is now advised to look at the financial

market response. Figure 12 depicts sovereign credit risk

correlation among selected Emerging Economies to Western

Europe institutions.

Each point displays the beta bivariate regression of Credit

Default Swap changes between October 2009 – February 2010

of Emerging Economy Sovereigns and Western Europe. Higher

point means larger correlation. Here we can see that Emerging

European Countries have the highest correlation (not a

surprising fact). Asian countries have the lowest level of

sensitivity.

The impact of (potential) shock should also be measured by

the size of total exposures. The latter should be compared to

domestic aspects, especially the foreign exchange generating

capacity. Countries that depend too much on portfolio

investment as source of funds would be likely to suffer more

in the event of sudden risk reversal.

This risk should not be underestimated. Capital would start to

flow again due to recovering risk appetite. As can be seen

from figure 13, emerging Asia would attract USD272.9 Billion

Figure 13. Regional Spill Over. Contagion most likely affects nearby countries before going to the

farther end. Therefore, peripheral European countries like Romania, Latvia, Bulgaria and Hungary

would suffer more should the GIPSI be experiencing a default. (Source: Deutsche Bank & IMF

Estimates).


portfolio investment in 2010, sharply increased from USD

191.1 billion in the previous year. This number would likely

grow to become even greater.

Sovereign risk is the most potential threat to global stability.

Although Greece and other troubled countries have currently

initiated serious fiscal stabilization and restructuring, the road

is still a long way to go. The austerity measures have drawn a

grim response from the public. The worst scenario in which

stabilization halts due to political pressure is not out of table.

World Economic Forum recognizes this as one of the pressing

issues in 2010 after the asset bubble.

… the road is still

a long way to go.

Figure 14. Capital Flows. Portfolio investments to emerging countries would rise in 2010 as

investors’ appetite recovered. Emerging Asia remains favorite destination due to its high yield

and exceptional economic performance. (Source: Institute of International Finance).

Capital inflows to Emerging Economies by Region, Net

USD billion

2007 2008 2009f 2010f

Private Flows 1252.2 649.1 348.6 671.8

Latin America 228.9 132.4 99.8 150.9

Emerging Europe 445.7 270.1 20.4 179.3

Africa/Middle East 155.4 75.3 37.4 68.7

Emerging Asia 422.2 171.2 191.1 272.9

Official Flows 42.9 55.5 63.6 43.4

Latin America 6.3 14.5 22.2 14.7

Emerging Europe 4.2 20.9 39.4 16.8

Africa/Middle East 3.7 1.5 1.9 5.6

Emerging Asia 28.6 18.5 0 6.3

Figure 15. Risk factor 2010. The biggest threats for global financial stability in 2010 are (1) asset

bubble burst and (2) sovereign risk. The latter is even getting more visible by the occurrence of

the GIPSI fiscal crisis. (World Economic Forum).

(Source: Medco)

Sovereign Risk

Asset Bubble


The Indonesian Perspective

From the domestic perspective, the fiscal crisis in Europe has

yet to take its toll. Thus far, market confidence remains intact,

shocks have not caused severe correction. Year to date, the

financial market indices are strengthening. Credit Rating

Agencies even upgraded Indonesia’s Standing, following

Moody’s & Fitch; S&P upgraded Indonesia’s Long Term

Foreign Currency rating by one notch from BB- to BB.

Indonesia has been implementing a conservative fiscal policy.

Government deficit has been maintained at a level not to

exceed 3%, and the debt to GDP ratio has been sharply

reduced to just below 30%. The refinancing risk is quite well

distributed.

The threat would be likely to come from sudden risk reversal.

Foreign players continue to buy Indonesian investments due

to its yield attraction. By April 2010, foreign position in

Sovereign Bond (SUN) and Certificate of Bank Indonesia (SBI)

has already exceeded the pre-crisis level (USD 15Bn and USD

7.7Bn respectively, see figure 16). The share of foreign players

is now around 23% in both instruments, a sharp increase

compared to about 6% five years ago.

… the fiscal crisis

in Europe has yet

to take its toll.

Figure 16. Government Debt Profile. Indonesia’s fiscal risk is fairly remote due to refinancing

needs that are tilted toward the further end. However, this could become a potential problem

should the Government not initiate a re-profiling. (Source: Ministry of Finance).

47 45

62

5045

38 3948

5660

1725

21 18 20

414

1810

127

1520

27

0

20

40

60

80

100

120

140

2010 2014 2017 2020 2023 2026 2029 2032 2035 2038


We view the influx of this type of money as shaky. These funds

emerge quickly after a crisis, however, they are the first to exit

upon the first sign of economic trouble. Nevertheless,

countries that are in the growing mode usually depend on

these funds since they usually suffer current account deficit.

The quality of external balance decreased significantly in

2010. The ratio of current account surplus to portfolio

investment was slightly above 1. This year it is predicted to fall

The quality of

external balance

decreased

significantly in

2010.

Figure 17. Capital Flows. Foreign investors dramatically increased their share in government

securities. The portion has surpassed the pre crisis level and the appetite has no sign of

diminishing. This is a good sign of confidence, nevertheless it must be treated with caution for its

potential reversal. (Source: Bank Indonesia).

Foreign Ownership (IDR tn)

-

50

100

150

200

250

Jan-08 Jun-08 Nov-08 Apr-09 Sep-09 Feb-100%

5%

10%

15%

20%

25%

30%

35%

40%

SUNSBI

% foreign in SBI% foreign in SUN

Figure 18. Balance of Payments. The quality of balance of payments is somewhat declining.

Foreign exchange supplied from trading activities has fallen off relative to speculative sources.

This higher dependency on portfolio investment could be perilous. (Source: Bank Indonesia).

3,954

-2,896

3,298

988

1,405

1,315

-4,742

-4,585

-24,478

35,932

11,454

3,442

4Q09*

12,506

-8,838

10,103

2,313

3,673

4,871

-15,331

-14,155

-84,316

119,513

35,197

10,582

2009*

8,190

-2,000

5,000

3,000

400

4,400

-10,764

-8,000

-89,897

106,051

16,154

1,790

2010f

3,5461,0523,955-1,94512,715Ov erall Balance

-970-4,144-829-7,309-4,775Other Inv estment

2,9881,9591,8591,7215,567Portf olio Inv estment

4724004533,4192,253Direct Inv estment

2,523-1,7571,502-1,8763,592

Capital and Financial

Account

1,2471,2001.1095,3645,104Current Transf er

-4,072-3,776-2.742-15,155- 15,525Income

-3,517-3,310-2,743-12,998- 11,841Serv ices

-22,781- 19,763-17,293-116,690- 85,260Imports Fob

31,27328,13024,179139,606118,014Exports Fob

8,4918,3676,88622,91632,754Goods

2,1502,4812,509 12610,492Current Account (CA)

3Q09*2Q09*1Q09*2008*2007(in USD mn )

3,954

-2,896

3,298

988

1,405

1,315

-4,742

-4,585

-24,478

35,932

11,454

3,442

4Q09*

12,506

-8,838

10,103

2,313

3,673

4,871

-15,331

-14,155

-84,316

119,513

35,197

10,582

2009*

8,190

-2,000

5,000

3,000

400

4,400

-10,764

-8,000

-89,897

106,051

16,154

1,790

2010f

3,5461,0523,955-1,94512,715Ov erall Balance

-970-4,144-829-7,309-4,775Other Inv estment

2,9881,9591,8591,7215,567Portf olio Inv estment

4724004533,4192,253Direct Inv estment

2,523-1,7571,502-1,8763,592

Capital and Financial

Account

1,2471,2001.1095,3645,104Current Transf er

-4,072-3,776-2.742-15,155- 15,525Income

-3,517-3,310-2,743-12,998- 11,841Serv ices

-22,781- 19,763-17,293-116,690- 85,260Imports Fob

31,27328,13024,179139,606118,014Exports Fob

8,4918,3676,88622,91632,754Goods

2,1502,4812,509 12610,492Current Account (CA)

3Q09*2Q09*1Q09*2008*2007(in USD mn )


to at least 0.36. The ratio tells us about the amount of foreign

exchange in the domestic market supplied from trading

activity compared to speculative activity. Larger ratio points to

a more solid external balance.

In this regards, it seems reasonable for Indonesia to take

precautious action. A major weakness spot is significant

portfolio investment exposure (especially in Bank Indonesia

Certificate, SBI). Authorities could either try to reduce the

threat by putting control measures into place, or reduce

domestic attractiveness by cutting benchmark rate.

Conclusion

In summary, we view 2010 as a continuation of recovery,

although the speed may vary. Advanced economies are

expected to grow significantly more slowly than emerging

countries. This is in part due to the disproportionate impact of

the crisis which triggered a global down turn in the first place.

Despite generally better economic conditions, a systematically

important risk still lingers. The risk is (in our opinion)

deteriorating sovereign credit. Fiscal sustainability,

particularly in a number of developed countries, has declined

substantially due to economic rescue. This carry over effect

has caught the investors’ attention, subsequently “punishing”

the troubled countries through a funding crunch. GIPSI

countries are among the first to face the investors’ anxiety.

While negotiations are still in progress, it is our view that

matters will not go easily. The European Union itself is rather

weak and so it is not exactly in the position of a rescuer. The

only “angel” left is the IMF. However, this institution has been

well-known for its harsh measures and interventionist policy

prescription. Surely, it would have a tough time dealing with

welfare state troubled countries. On the other hand, the

stigma as IMF patient would also be unpleasant.

Extended negotiations further aggravate the problems as

countries have to deal with unfeasible market decisions which

might bring them a political blow. Should it escalate, the latter

would force the worst scenario, namely sovereign default,

into work.


Fertilizer is one of the vital agricultural production facilities in

the context of endeavors for promoting food security program

and improving the national plantation sector. In this respect,

enhancing productivity is a major demand while it is

increasingly difficult to conduct land extensification. However,

up to the present time, the domestic fertilizer industry is still

facing a relatively large number of obstacles, ranging from the

continuity of raw material supply, out-dated factories, up to

the issue of financing national fertilizer industry revitalization.

Therefore, it is only reasonable for the Government to pay

special attention to this industry.

The current issue under discussion will be limited specifically

to the chemical fertilizer industry, bearing in mind its

dominant position compared to organic fertilizer. To date,

chemical fertilizer consumption has reached 8 million tons,

while organic fertilizer consumption ranges only about 1 to 2

million tons.

Domestic Need for Fertilizer

Domestic need for fertilizer has shown an increasing trend

year by year. Domestic consumption of urea fertilizer,

TSP/SP36, ZA, and NPK has grown by an average of 5% per

year in the last five years. Fertilizer consumption in 2008

reached a total of 8.24 million tons and was predicted to

increase to 8.66 million tons in 2009. Fertilizer consumption in

2010 is predicted to increase to approximately 9 to 10 million

tons.

Domestic demand for fertilizer is still dominated by urea

fertilizer (69.2%), followed by NPK (14.3%), ZA (9.4%), and

TSP/SP36 (7.1%). At the same time, based on the use of

fertilizer, the distribution of fertilizer for the agricultural sector

accounts for the highest percentage, namely around 76%,

followed by the plantation sector with a total of 11%, and the

industrial sector totaling 10%.

Fertilizer Industry in Indonesia: Raw Materials Continue to be the Main Obstacle Nadia Kusuma Dewi ([email protected])

Domestic

consumption of

fertilizer has grown

by 5% per year in

the last five years

…

… dominated by

urea fertilizer

(69.2%)


National Production of Fertilizer and the Structure of

Industry

The national production of fertilizer has been competing

fiercely against its consumption with an average production

growth of 4% per year. In 2008, the national production of

fertilizer accounted for 8.6 million tons and was estimated to

increase to 8.9 million tons in 2009. Fertilizer production in

2010 is projected to reach 11.4 million tons in line with the

increase in the production capacity of certain fertilizer plants.

Based on the composition of type of demand, urea makes up

the largest portion of the national production of fertilizers

(72.2%), followed by NPK (13.4%), ZA (8.7%), and TSP/SP36

(5.7%). At the same time, national production utilization of

fertilizer has varied based on the type thereof. Production

utilization of urea fertilizer in 2009 was about 85%. At the

same time, the production utilization of ZA fertilizer had

exceeded 100%. On the other hand, the production utilization

of NPK fertilizer was relatively low, namely about 51%.

However, the production utilization of NPK fertilizer has been

estimated to increase significantly in the coming years due to

an increase in the demand for NPK fertilizer in line with the

conversion program from single fertilizer to compound

fertilizer.

Figure 19. Domestic Consumption of Fertilizer and Fertilizer Consumption by Type. Domestic

consumption of fertilizer has grown by an average of 5% per year. In 2010, the domestic

consumption of fertilizer is predicted to account for 9 to 10 million tons. Demand for urea

fertilizer still dominates the total domestic demand for fertilizer at around 69%. (Source:

Indonesian Fertilizer Manufacturer Asossication)

Urea

69.2%TSP/SP36

7.1%

ZA

9.4%

NPK

14.3%

Agriculture Sector Fertilizer Consumption by Type (%)

7.627.88

8.248.66

34.029.925.7

23.523.6

2001 2003 2005 2007 2009F

Domestic Consumption of Fertilizer (Mn Ton)


The market structure of the fertilizer industry is oligopolistic,

whereby fertilizer production is controlled by five major State-

Owned manufacturers, namely PT Pupuk Sriwijaya, PT

Petrokimia Gresik, PT Pupuk Kalimantan Timur, PT Pupuk

Kujang, and PT Pupuk Iskandar Muda. PT Pupuk Kaltim, PT

Pupuk Sriwijaya, and PT Pupuk Petrokimia Gresik have the

largest production capacity, controlling 79.5% of the

production share.

Most of State-Owned fertilizer manufacturers prioritize the

production of urea fertilizer considering its high consumption

share compared to other fertilizer types, in addition to the

factors of economies of scale and fertilizer price subsidies

through the Highest Retail Price (HET). Among the national

Figure 20. National Fertilizer Production Capacity. Most of State-Owned fertilizer companies

have determined the production of urea fertilizer as a priority considering its high consumption

share compared to other fertilizer types, in addition to the factors of economies of scale and

fertilizer price subsidies through the Highest Retail Price. Among the national fertilizer

manufacturers, PT Petrokimia Gresik produces the most varied fertilizer type. (Source: Pusri)

Company Product Capacity (Ton/Year)

PT Pupuk Sriwijaya

Pusri II Urea 552,000

Pusri III Urea 570,000

Pusri IV Urea 570,000

Pusri IB Urea 570,000

PT Petrokimia Gresik

ZA I Amonium Sulphate 200,000

ZA II/III Amonium Sulphate 250,000/200,000

SP-36 I/II Phosphate (2X) 500,000

Urea Urea 460,000

Phonska I NPK 460,000

Phonska II & III NPK 1,280,000

NPK I NPK 100,000

NPK II NPK 100,000

NPK III & IV NPK 200,000

NPK Blending NPK 60,000

PT Pupuk Kujang

Kujang IA Urea 570,000

Kujang IB Urea 570,000

NPK Blending NPK 300,000

PT Pupuk Kalimantan Timur

Kaltim I Urea 700,000

Kaltim 2/3 Urea (2x) 570,000

Popka Urea (Granule) 570,000

Kaltim IV Urea (Granule) 570,000

NPK Pelangi NPK 450,000

PT Pupuk Iskandar Muda (PIM)

PIM I Urea 570,000

PIM 2 Urea 570,000


fertilizer manufacturers, PT Petrokimia Gresik produces the

most varied fertilizer types. At the same time, there is no

factory producing K fertilizer in Indonesia to date so that

domestic demand for K fertilizer is still being met by importing

this product. One of the K fertilizer types is KCl which is

frequently used for horticulture and irrigation fertilizer

(fertigation).

Prices and Cost Structure

World fertilizer prices increased significantly by the middle of

2008, driven by the increase in fertilizer demand in the main

biofuel-producing countries, such as the USA, Brazil, and the

European Union along with the increase in the world oil

prices.

In the third quarter of 2008, urea fertilizer prices dropped

sharply, following a fall in the world oil price and decrease in

the world fertilizer demand. In 2009, the world urea fertilizer

price was relatively stable below the level of USD300 per short

ton to date. The fertilizer price in 2010 is estimated to remain

relatively stable. In this respect, there is a potential price

increase along with the global economic recovery, including

the improvement of the agricultural and plantation sectors.

Figure 21. World Price of Urea Fertilizer. World price of urea fertilizer increased significantly by

the middle of 2008, driven by the increase in fertilizer demand in the main biofuel-producing

countries, such as the USA, Brazil, and the European Union along with the increase in the world

oil prices. In the third quarter of 2008, urea fertilizer prices dropped sharply, following a fall in

the world oil price and decrease in the world fertilizer demand. In 2009, the world urea fertilizer

price was relatively stable below the level of USD300 per short ton to date. (Source: Bloomberg)

0

100

200

300

400

500

600

700

800

900

5/15/2008 8/15/2008 11/15/2008 2/15/2009 5/15/2009 8/15/2009 11/15/2009 2/15/2010 5/15/2010

USD/Short

ton

In 2009, the world

urea fertilizer price has

been relatively stable

below the level of

USD300 per short ton

to date. The fertilizer

price in 2010 is

estimated to remain

stable relatively.


Increase in the world fertilizer price in 2008 caused significant

disparity in the fertilizer price between the domestic market

(particularly subsidized fertilizer) and the international

market. Such conditions boosted illegal exports of fertilizer for

the purpose of selling the product at a higher price. However,

current prices of fertilizer in both domestic and international

market are relatively at the same level. For export purposes,

producers must pay even a higher price due to transportation

and shipping costs so that the selling price of fertilizer in the

domestic market becomes more competitive. Therefore, it can

be expected that the current domestic fertilizer supply is at a

safe level.

With respect to the fertilizer price in the domestic market, the

Government increased the Highest Retail Price (HET) of

fertilizer on April 9, 2010. HET of urea fertilizer increased from

IDR1,200 to IDR1,600, ZA fertilizer increased from IDR1,050 to

IDR1,400, NPK Phonska fertilizer increased from IDR1,750 to

IDR2,300, NPK Pelangi fertilizer increased from IDR1,830 to

IDR2,300, and NPK Kujang fertilizer increased from IDR1,586

to IDR2,300. At the same time, HET of TSP fertilizer which had

been previously set at IDR1,550 was cancelled in 2010. On the

other hand, SP36 fertilizer, previously exempted from HET, is

charged with HET in the amount of IDR2,000.

Figure 22. Highest Retail Price (HET) of Subsidized Fertilizers before April 9, 2010. HET of

subsidized fertilizers increased lastly in 2006 before finally increased again in April 9, 2010. The

stipulation of HET of subsidized fertilizers by the Government is aimed at securing the continued

supply of low-cost fertilizers for farmers. However, large price disparity between subsidized and

non-subsidized fertilizers has occasionally caused the misuse of subsidized fertilizer allocation.

(Source: Indonesian Fertilizer Manufacturer Asossication)

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1998*

1999

2000

2001

2002

2003**

2003**

*

2004

2005

2006**

**

2007

2008

Urea ZA TSP

*) Since December 1, 1998

**) January 1, 2003 - July 31, 2003

***) August 1, 2003 - December 31, 2003

****) Since May 17, 2006

IDR/kg


The stipulation of HET for subsidized fertilizers by the

Government is aimed at securing the continued supply of low-

cost fertilizers to farmers. However, the large disparity of price

between subsidized and non-subsidized fertilizers occasionally

causes the misuse of subsidized fertilizer allocation. On the

other hand, such policy puts pressure on fertilizer

manufacturers, especially when there is an increase in price of

fertilizer raw materials such as natural gas, phosphate, sulfur

and potassium. Raw materials constitute the largest

component in the cost structure of the fertilizer industry (70%-

80%) in which cost of gas contributes to 50%-60% of the total

production cost structure. Periodic determination of HET

should consider the increase in price of raw materials of

fertilizers by offering a win-win solution for the benefit of both

farmers and fertilizer manufacturers.

The stipulation of HET

for subsidized

fertilizers is aimed at

securing the continued

supply of low-cost

fertilizers to farmers.

Figure 23. The Structure of Production Costs of the Fertilizer Industry and Gas Price. Raw

materials contribute around 70%-80% of the cost structure of fertilizer industries so that the

increase in price of main raw materials such as gas will considerably affect the increase in

production costs. (Source: Company, Bloomberg)

0

3

6

9

12

15

5/18/2007 2/18/2008 11/18/2008 8/18/2009 5/18/2010

2.21.9

2.93.45.7

84

Raw

mate

rials

Wages &

sala

ry

Depre

cia

tion

Packagin

g

Main

tenance

Oth

ers

Tota

l

Pupuk Kaltim Production Cost

(%)

World Natural Gas Price

(USD/MMBtu)


Subsidy Pattern

The current fertilizer subsidy pattern is fertilizer subsidy which

is paid to the manufacturers through the subsidy of gas price,

the impact of which is further transferred to the farmers

through HET stipulated by the Government. From the

manufacturers’ point of view, such gas price subsidy

mechanism has weaknesses since it does not take into

account cost aspects other than gas, while in fact, fertilizer

manufacturers must incur costs other than gas, such as

transportation and operational costs, including distribution

costs to the stockpilling warehouses in provincial and

regency/municipal capital within their marketing areas.

At the same time, a discourse has been developing suggesting

that the Government replace the existing subsidy pattern for

commodities with direct subsidies for farmers. This discourse

has been based on the great number of cases of the misuse of

subsidized fertilizer allocation by large plantations and

subsidized fertilizer smuggling overseas at times of large price

disparities.

However, plans for transfering direct fertilizer subsidies to

farmers must also be accompanied by evaluation in order to

ensure that the funds received are truly and effectively used

for increasing agricultural productivity rather than for

consumption or other costs of living. In addition, the

mechanism of direct subsidies to farmers requires accurate

data on subsidy receivers in order to enable strict supervision

with the aim of minimizing the misuse of fertilizer subsidies.

The Trade System and Distribution of Fertilizers

The Government has regulated the procurement and

distribution pattern of subsidized fertilizers to the agricultural

sector under the zoning pattern of fertilizer distribution for

fertilizer manufacturers.

The current fertilizer

subsidy pattern is

fertilizer subsidy

which is paid to the

manufacturers

through the subsidy of

gas price, the impact

of which is further

transferred to the

farmers through HET

stipulated by the

Government.


The distribution of fertilizers is conducted by manufacturers

gradually, starting from the plant warehouse (Line I) to be

distributed to the provincial warehouse (Line II), the

regency/municipal warehouse (Line III) and subsequently

allocated to the retailers (Line IV) through distributors. The

distributors purchase fertilizers from the manufacturers in

Line III to be distributed to the retailer kiosk in Line IV located

in certain districts. Distributors are not allowed to purchase in

a large quantity and are only allowed to purchase fertilizers in

a pre-determined total volume needed by the districts.

At the same time, retailers purchase fertilizers from a

distributor only for the purpose of being subsequently sold to

the farmers directly.

As of January 1, 2009 the distribution of subsidized fertilizers

from Line IV Distributors (retailers) to farmers/farmer groups

has been implemented closely based on the Definitive Plan for

Group Needs (RDKK). In this respect, farmers are entitled to

obtain subsidized fertilizers from retailers directly and the

retaliers are only allowed to sell the fertilizers to the farmers

registered with a farmer group, verified by the Village Head,

District Head, and Regent. Accordingly, subsidized fertilizers

are not sold freely. Each farmer, plantation farmer, cattle

Figure 24. Zoning Pattern of Distribution of Subsidized Urea Fertilizer. As a strategic commodity,

the Government regulates the zoning of fertilizer distribution for domestic fertilizer

manufacturers which is adjusted with the production capacity of each manufacturer. If a certain

manufacture fail to exercise its obligations, for example due to the increase in needs, the

Department of Industry stipulates the reallocation of supply to other manufacturers. (Source:

Pusri Holding)

Perusahaan Wilayah Pemasaran

PT Pupuk Sriwijaya

Nanggroe Aceh Darussalam, Sumatera Utara, Sumatera Barat, Jambi, Riau,

Bengkulu, Sumatera Selatan, Bangka Belitung, Lampung, Kep. Riau, Jawa

Tengah I, DIY, Kalimantan Barat

PT Pupuk Kujang Banten, DKI Jakarta, Jawa Barat, Jawa Tengah II

PT Petrokimia Gresik Jawa Timur I (for urea fertilizer), all region (for ZA, SP36, NPK, and organic

fertilizer)

PT Pupuk Kaltim

Jawa Timur II, Bali, Nusa Tenggara Barat, Nusa Tenggara Timur, Kalimantan

Tengah, Kalimantan Selatan, Kalimantan Timur, Sulawesi Utara, Sulawesi

Tengah, Sulawesi Tenggara, Gorontalo, Sulawesi Selatan, Sulawesi Barat,

Maluku, Maluku Utara, Papua, Papua Barat

As of January 1, 2009

the distribution of

subsidized fertilizers

from Line IV

Distributors (retailers)

to the farmers/farmer

groups has been implementing closely

based on Definitive

Plan for Group Needs.


raiser, as well as fish and shrimp cultivator must join a farmer

group and prepare an RDKK to be ratified by the Field

Counseling Officers as well as local Village Head concerned is

coordination with the local Regency/Municipality Foodcrops

Agricultural Service Office. This policy has been adopted to

enable the Government to identify accurately the need for

urea fertilizer in each area in addition to facilitating the

supervision of the distribution of subsidized urea fertilizers.

Obstacles encountered by the Fertilizer Industry

1. Some factories have been more 20 years in existence so

that the factory efficiency level is low and maintenance

costs are high.

2. The limited supply of natural gas causes non-optimized

operation of the factories. The Asean Aceh Fertilizer (AAF)

fertilizer factory, for example, had stopped its operation

since 2004 and PIM 1 and 2 fertilizer factories had stopped

their production since September 2005.

Figure 24. Operational Age of Several Fertilizer Factories. The operational age of several State-

Owned fertilizer factories have been out-dated so that their efficiency level is low and their

maintenance cost is high. Accordingly, it is necessary to implement replacement and relocation

of factories with an operational age of above 25 year and fertilizer factories with the gas

consumption more than 30 MMBtu per ton urea. (Source: Pusri Holding)

Company Product Established Operation

PT Pupuk Sriwijaya

Pusri II Urea 1959 1974

Pusri III Urea 1976

Pusri IV Urea 1977

Pusri IB Urea 1993

PT Petrokimia Gresik

ZA I Amonium Sulphate 1972 1972

ZA II/III Amonium Sulphate 1984/1986

SP36 I/II Phosphate 1979/1983

Urea Urea 1995

Phonska (NPK) NPK 1999

NPK Blending NPK 2004

Phonska RFO I NPK 2004

NPK Granulation I NPK 2006

NPK Granulation II NPK 2008

PT Pupuk Kujang

Kujang IA Urea 1975 1979

Kujang IB Urea 2005

PT Pupuk Kalimantan Timur

Kaltim I Urea 1984

Kaltim 2/3 Urea 1985/1989

Popka Urea (Granule) 1999

Kaltim IV Urea (Granule) 2002

PT Pupuk Iskandar Muda (PIM)

PIM I Urea 1982 1984

PIM 2 Urea 2005

Continuity of raw

material supply, out-

dated factories, and

the issue of financing

are still encountered

by the national

fertilizer industry .


3. Price of natural gas for new contracts tends to increase so

that the production cost is increasingly high, while the

selling price of fertilizer is determined by the Government.

4. The term of contract of gas for fertilizer factories is only

for a period of 5 years in average, while the banking sector

requires the guarantee of contract for gas raw materials

for an extended period of time, namely around 10-15

years, for providing banking financing support.

5. The urea fertilizer subsidy is based on the natural gas price

subsidy. From the manufacturers’ point of view, this

subsidy mechanism does not take into account other than

gas cost aspects.

6. There is a significant disparity between the subsidized

fertilizer price determined with HET and non-subsidized

fertilizer price. The same thing frequently occurs between

the domestic price of subsidized fertilizer and fertilizer

price in the international market. Accordingly, there is

occasional misuse of subsidized fertilizer allocation and

illegal exports of fertilizer for the purpose of selling the

product at a higher price.

7. Java Island accounts for the largest demand for urea

fertilizer (~60%), while the largest urea fertilizer

manufacturer is located outsine Java Island (~80%),

accordingly there is a high transportation cost demand for

distributing the fertilizers.

8. Import reliance for the raw materials of non-urea fertilizer

such as phosphate, sulufr and calium/potassium remains

high.

9. The non-urea fertilizer is included in the classification of

15 fertilizers which must implement mandatory fertilizer

SNI. However, in practice, fertilizers the SNI product

certificate of which is still in doubt or the brand of which is

falsified are still occasionally distributed.

Measures to be Undertaken by the Government

1. Formulate both replacement and relocation plan for out-

dated factories, namely fertilizer factories with the

operational age of over 25 years and fertilizer factories

which consume more than 30 MMBtu of gas per ton urea.

The operational standard of efficient fertilizer factories is

24-26 MMBtu per ton urea. In this respect, it is necessary

to restructure the engines/equipment of fertilizer

The Government must

adopt a policy

supporting the

national fertilizer

industry.


factories. At the same time, relocation will be conducted

to areas having sources of raw materials of gas or areas

with a significant need for fertilizers. There are 3 potential

locations for producing gas, namely Tangguh (Papua),

Masela (Southeast Maluku), and Senoro (Central

Sulawesi).

2. Working on the renewal of contracts for natural gas and

prepare master plan for natural gas needs for the fertilizer

industry in the short, medium and long-term as well as

review the export sale of natural gas, the contract of

which has expired so that the gas can be utilized for

domestic needs.

3. Bearing in mind that most of the types of fertilizers

produced domestically are single fertilizers (urea, ZA, SP-

36), the opportunity for establishing new factories must

be directed to the development of non-urea compound

fertilizers such as TSP and NPK which are still limited.

Other countries’ experiences show that the use of

compound fertilizers will increase productivity.

4. The Government needs to provide incentives in order to

increase investment in the fertilizer industry, by among

other things providing customs duties incentives for non-

urea fertilizer raw materials, considering that about 50%-

60% thereof must be imported.

5. Promote the development of organic fertilizers by the

private sector or through private and State-Owned

Enterprises partnership by using the distribution facilities

of State-Owned Enterprises. The development of organic

fertilizers may open up an opportunity to fulfil the

consumers’ needs of “organic” agricultural products as

well as to improve land conditions.

6. Improve coordination and supervision among related

institutions in implementing the trade system and the

national distribution pattern of fertilizers in order to

prevent fertilizer scarcity. The distribution pattern of

subsidized fertilizers is still ocassionaly misused due to the

price disparity between subsidized fertilizers and non-

subsidized fertilizers, resulting in the misuse in the

allocation of subsidized fertilizers for foodcrops agriculture

to other sectors.

7. Improve supervision of the implementation of mandatory

fertilizer SNI.


The Electricity Tariff (Tarif Dasar Listrik/TDL) increase scenario

has become public knowledge in the beginning of this year.

Over the past few weeks, the issue of the plan to raise

electricity tariff re-emerged as the government was going to

submit the plan for TDL increase to the House of

Representatives in July 2010. Electricity falls into the category

of public goods supplied by the government; therefore the

level of its price is also controlled by the government

(administered price). Government intervention is needed to

promote more equitable electricity distribution and public

welfare. One of the forms of government action in the context

of electricity policy is to increasing the TDL. However, what

are the potential implications of such government action?

The government estimates that in 2H10, the public purchasing

power has started to improve, so that it is both necessary and

possible to alleviate the burden of electricity subsidies born by

the state. The budget currently allocated by the government

for electricity subsidies reaches IDR54.5 trillion. The policy on

TDL increase is mandated by Law No. 47 Year 2009 concerning

the 2010 State Revenues and Expenditures Budget, in an

effort to reduce subsidies. This plan also refers to Law No. 30

Year 2009 concerning electricity stipulating that all forms of

tariff determination shall be subject to the approval of the

House of Representatives.

In accordance with Financial Note and the Draft State

Revenues and Expenditures Budget-Amendment of the 2010

Fiscal Year proposed by the Government to the House of

Representatives of the Republic of Indonesia on March 1,

2010, the total electricity subsidies required in the Draft State

Revenues and Expenditures Budget-Amendment for the 2010

Fiscal Year reached IDR54.5 trillion with the appertaining

details, the total electricity subsidies in the current year of

2010 total IDR53,6 trillion, the total additional revenue for

6.600 VA is IDR3.1 trillion, the total deficit of electricity

subsidies in 2009 was IDR4.00 trillion and the total electricity

subsidy requirement in 2010 is IDR50.5 trillion. Therefore,

with the allocation of electricity subsidies (the 2010 State

Impact of Electricity Tariff Increase: A DyRec-CGE Analysis Reny Eka Putri ([email protected])

Government

maintains the

electric power tariff

for fulfilling the

electricity need


Budget) of only IDR37.8 trillion, the total electricity subsidies

required will amount to IDR16.7 trillion.

This plan for TDL increase is also a part of government efforts

to achieve cost efficiency and to gradually determine

electricity tariffs through the market mechanism. In this

article, an analysis will made of the potential impact of TDL

increase on Indonesia’s economy, from the aspects of macro,

sectoral and regional economy.

The National Electricity Requirement Remains High

The domestic electric power growth potential has been

relatively high as indicated by the electrification ratio which

has only reached around 67.6% this year. However, the

electricity sector continues to face various obstacles as a

result of the lack of new power plant installation, high cost

and low investment. In the midst of these obstacles, electricity

demand will continue to increase as a result of population

growth, industrial need and increasingly developing economic

activities. We estimate that electricity demand will continue to

increase with an average growth of 9.17% per year within the

next 10 years and the capacity of national power plants will

reach 86 GW.

Figure 25. Projection of Population & PLN Consumers. The government predicts that the

population growth will continue to increase to 255.8 million people. This rate will also be

followed by the increase of PLN consumers. Therefore, the national need for electricity will

continue to rise. (Source: RUPTL 2008-2019)

The electrification

ratio is expected will

increase to reach

72.6% in 2012

Indonesia is still

experiencing high

growth for

electricity demand

231 234 236 239 242 245 248 250 253 256

41 43 46 49 52 54 58 61 64 68

0

50

100

150

200

250

300

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

(mn people)

Population PLN Consumer


This year, the electrification ratio (the ratio of households with

electricity compared to the total number of households) which

is only around 67.6%, is expected to reach 73.8% in 2012 and

95.5% in 2018 in line with a higher energy demand. The

acceleration of the electrification ratio will be much needed,

particularly outside Java and Bali Islands, considering that

their ratio which is currently still low (55.0% - 60.0%), and it is

expected that the stimulus can increase the ratio up to the

level of 66.3% in 2012.

Domestic Electricity Consumption Continues To Be

Dominated by The Household and Industrial Sectors

The increase of household electricity consumption has been in

line with the increase of public income. The increasing public

income will expand the consumption impulse not only in food,

but also in non-food commodities such as entertainment (the

use of electronic goods), leading to a rapid increase in

electricity consumption. Electricity consumption (not only for

lighting purpose) has continued to expand and rapidly

increase mainly in large cities. Based on the data of DGE&EU

(the Directorate General of Electricity and Energy Utilization),

in 2009 the proportion of household electricity consumption

reached 40.0%, higher compared to that of industrial

electricity consumption of 35.0%.

Figure 26. Projection of Electricity Demand Growth. The government predicts that in the

following year, electricity demand in Java-Bali will remain higher than that outside Java-Bali. This

is due to the fact that industries are still concentrated in Java-Bali. A more dense population

composition compared to outside Java-Bali also contributes to the high electricity demand.

(Source: DGE&EU, 2009)

No. Unit 2008 2009 2010* 2012* 2014* 2018*

1 Energy Demand TWh

Indonesia 128.9 138.7 153.1 186.2 225.4 325.2

Java-Bali 100.9 107.8 119.0 144.6 174.9 250.9

Outside Java-Bali 28.0 30.9 34.1 41.6 50.5 74.3

2 Energy Demand Growth (%)

Indonesia 6.5 7.6 10.4 10.2 9.8 9.4

Java-Bali 5.6 6.8 10.3 10.2 9.7 9.2


4 Electrification Ratio (%)

Indonesia 62.8 64.8 67.6 73.8 80.4 95.5

Java-Bali 68.2 70.2 72.9 78.4 84.2 97.3



The composition of electricity consumption in Indonesia has

tended to remain stable from year to year. Household

consumption still accounts for the highest proportion reaching

up to 40.0% of the total national consumption, while the

consumption in the industrial sector ranks in the second place

reaching up to 35.0% in 2009. The relatively large Indonesian

population has stimulated the rate of household electricity

consumption.

In order to achieve optimum electricity supply, a new strategy

needs to be more developed, particularly for regions with low

electrification ratio such as the rural areas. There has also

been an increase in the number of innovation programs

implemented.

Compared to electricity consumption in the period of 2002-

2008, the rate of electricity production has been constantly

higher. Changes in production and consumption composition

occurred in 2009, when the level of consumption increased up

to 133120 GWh, above the level of production which

amounted to only 115174 GWh. The higher electricity

The rising demand

of electricity is

corresponding to

the growth of

economy

Figure 27. National Electricity Consumption Over the Last 5-years. Indonesian electricity

consumption has indicated an increase from year to year. Since 2005, the average electricity

consumption growth per year has reached 5.8%. This increasing trend has also been occurring in

the household sector, while the industrial sector indicated a downward trend in 2009. (Source:

DGE&EU, CEIC).

105987111402

119969127637

133120

0

20000

40000

60000

80000

100000

120000

140000

2005 2006 2007 2008 2009

(GWh)

-1000

9000

19000

29000

39000

49000

59000

(GWh)

Total (RHS) Social Institutional (LHS) Household (LHS)

Industrial (LHS) Business (LHS) Public (LHS)


consumption level indicates higher demand and poses a

challenge in meeting the need for electricity, particularly in

areas with a low electrification ratio. Improving economic

activities have certainly increased the demand in electricity

consumption.

Indonesia’s Electricity Tariffs Price Amongst Other Countries

Electricity tariffs in Indonesia are among the lowest compared

to regional electricity tariffs. The average tariff of countries in

Southeast Asia is above IDR782/kWh, while in Indonesia it is

still IDR518/kWh. The electrification ratio in Indonesia has also

been among the lowest in the Asian region, reaching only

65.0%. This ratio is far below that of Thailand and Malaysia

(reaching up to 90.0% and 82.0%, respectively). Under such

conditions, the government has sufficient space to continue

promoting infrastructure projects and stimulate investment in

the electricity sector.

Figure 28. National Electricity Production vs. Consumption. In 2009 Production decreased up by

22.5% YoY, while electricity consumption increased by 4.3% YoY. Electricity consumption

indicated an increasing trend from year to year. Electricity consumption was finally has able to

exceed the level of electricity production in 2009. (Source: DGE&EU, CEIC).

Indonesia electricity

tariff is cheaper

than most of Asian

countries tariff

0

20000

40000

60000

80000

100000

120000

140000

160000

2002 2003 2004 2005 2006 2007 2008 2009

(GWh)

Production Consumption


In promoting national economic activities, the government has

been constantly adopting policies related to state revenues,

economic efficiency and domestic resources management.

The Government has proposed to reduce electricity subsidies

to IDR7.3 trillion and to cover any deficit resulting from such

subsidy reduction.

Government policy on basic electricity tariffs has been to

gradually direct electricity tariffs at achieving their economic

value according to a plan, which will subsequently follow the

market mechanism. Therefore, the average electricity tariff

can fully cover all types of costs expended (full cost recovery).

The Government is currently preparing the formulation of the

amount of the 2010 TDL to replace the current TDL which has

been applicable since 2004. This policy is expected to be able

to make the necessary adjustment in the need of Perusahaan

Listrik Negara as a stated-owned electricity utility and public

capacity in order to prevent any disruption to economic

activities.

As an indicator of the success rate of the policies introduced,

an analysis of government and monetary policies is often

conducted. One of the scenarios of government policy in the

Government

proposes TDL

increase by 10% in

July 2010

Figure 29. Electrification Ratio Compared to Selected Asian Countries. The electrification ratio

in Indonesia has been among the lowest compared to that of several other Asian countries. This

indicates non-optimal electricity utilization. The development of electricity infrastructure and

electricity-related investment are absolutely required. (Source: DGE&EU, 2009)

100% 100%

90%82%

65%60% 60%

0%

20%

40%

60%

80%

100%

120%

China Singapore Thailand Malaysia Indonesia Cambodia Laos


context of achieving the much discussed efficiency and

reducing electricity subsidies is related to the government’s

plan to increase basic electricity tariffs by 10.0% this coming

July 2010.

DyRec-CGE Analysis at a Glance

In analyzing the impact of TDL increase on economic condition

in the aggregate and at the sectoral and regional levels, we

have adopted the DyRec-CGE Model application.

Since the mid-1990’s decade, DyRec-CGE (Dynamic Recursive

Computable General Equilibrium) application has been used to

analyze various economic phenomena. DyRec-CGE is a model

of general equilibrium allowing calculation and analysis of

economic components.

The DyRec-CGE model is a model of economy constructed by

relating individual and corporate behaviors at the micro level

with the economic scales at the macro level. It seeks to

explain the behavior of supply, demand and prices in a whole

economy with many markets, by seeking to prove that

equilibrium prices for goods exist and then all prices are at

equilibrium. General equilibrium exists when all markets are in

equilibrium simultaneously.

The DyRec-CGE model is prepared based on IO (Input-Output)

table released by BPS Statistics Indonesia. IO Table functions

as a tool to determine the classification of components to be

used in the DyRec-CGE model as well as to provide initial value

for equation parameters in the DyRec-CGE model.

The Input-Output table depicts inter-industry relations of an

economy. It shows how the output of one industry is an input

to another industry. Data in the IO table include national data

aggregated into:

1. Industry. A national model consisting of 44 goods and

services produced by 44 industries. Every industry

produces different outputs so that the total set of

commodities produced will be equal to the total set of

industries.

2. Commodity. DyRec-CGE contains 44 types of goods from

domestic sources and imports.

Analysis seeks to

explain the behavior

of supply, demand

and prices in a

whole economy with

many markets

Data &

Methodology

Analysis


3. Factors of Production. Factors of production of manpower

are classified into four types of employment, namely:

farmers, operators, administrators and professionals,

whereby all manpower are assumed to be fully mobile

among sectors.

4. Households. The model consists of ten classifications of

households located in rural and urban areas in 30

provinces in Indonesia.

Aggregation is conducted not only with regard to the data on

domestic and import transactions for producer price, but also

data on final demand consisting of consumption, investment,

government expenses and exports as well as includes other

inputs such as salaries and capital.

DyRec-CGE projection is aimed at identifying and analyzing the

impact of the changes in the in macro, sectoral and regional

economy variables on basic electricity tariff increase.

Impact of Electricity Tariff Hike (A Simulation Study)

Macro Economy Impact

Based on the results of simulation of DyRec-CGE analysis,

government policy to increase TDL by 10.0% on the

performance of macro economy is presented in the following

table.

TDL increase has less beneficial impact on macro economy

indicators. Gross Domestic Product (GDP) falls by 0.12% as a

result of investment reduction by 0.94%. It also forces real

Figure 30. Macro Economy Impact: Basic electricity tariff increase by 10.0% has a negative

impact on the economy. Several economic indicators indicated a negative response to this

government policy plan. (Source: Bank Mandiri Calculation).

No. IndicatorImpact

(%)

1 Real GDP (Gross Domestic Product) -0.12

2 Household Consumption 0.21

3 Total Investment -0.93

4 Terms of Trade 0.04

5 Real Wage -0.20

6 CPI (Consumer Price Index) 0.27


income down to 0.20%. Household consumption tends to be

stagnant as the public will undergo the process of substitution.

For example, some people will efficiently use high-voltage

electronic appliance (microwave) for cooking by substituting it

for non-electrical appliance (gas stove), therefore the process

of consumption will continue to occur.

The increase of cost of production in several industrial sectors

will provide producers with an opportunity to increase goods

and service price inducing price increase at the consumer

level. The impact of TDL increase on inflation reaches 0.27%.

Sectoral Impact

Conclusion cannot be drawn merely based on the impact of

TDL fluctuation on macro economy variables. In order to

obtain a more detailed description, analysis at the sectoral

and regional levels is needed due to Indonesia’s diverse

industrial sectors (commodities) and demographic

composition. The change of policy does not necessarily receive

the same response from various economic actors in every

industry or province.

Electrical energy is an input utilized by almost all economic

activities in terms of both production and consumption. In

general, the impact of basic electricity tariff is varied

depending on the intensity of the use of electric power and

TDL increase will

provide producers

an opportunity to

increase goods &

service price

Figure 31. Sectoral Impact: 10 Most Severely Hit Industries. Basic electricity tariff increase will

have a significant impact on most industrial sectors. Out of 44 industrial sectors included in the

analysis, only 15 industries are able to maintain their level of output. (Source: Bank Mandiri

Calculation).

No. IndicatorImpact

(%)

Electricity Share

(%)

1 Electricity -3.33 19.30

2 Iron-Steel -1.05 4.30

3 Electricity Machine -0.77 0.90

4 Other Industries -0.63 5.40

5 Textile-Clothes-Leather -0.53 10.00

6 Gas-Water -0.43 1.00

7 Oil Refinery -0.42 0.10

8 Metal Industry -0.38 3.60

9 Transport Vehicle -0.30 2.10

10 Footwear -0.29 0.50


the characteristics of the production process of each industry.

The higher intensity of the use of electrical power as input, the

more significant impact the TDL change is expected to have on

the performance of a sector or industry.

TDL Increase Causes Contraction in Various Industrial Sectors

Electricity-intensive sectors, including the iron-steel mining

industry, electrical equipment (power plant system,

transmission and distribution) and other industries requiring

abundant power supply will be most affected. The impact will

also become more significant as these industries have a low

level of input substitution.

It would not be a surprise if the income of electricity intensive

sectors will decrease due to a relatively high level of electricity

use in their business processes. The inputs of Textile-

Garment-Leather sectors fall to 0.5% due to relatively large

electricity share, 10.0% of the total industry. Similarly, the

output of iron-steel industry with the proportion of electricity

use of 4.3% of the total industry, decreases to 1.05%.

Highly competitive industry types (for example Steel and

Textile) or administered price industry types (Gas-Water) will

face a difficulty in carrying on the burden of increase in input

price to consumers. The responses given by these industries

are related to output decrease.

As a whole, we can say that TDL increase causes decrease in

industrial outputs by 0.2% on average. Industries are expected

to take anticipative measures to minimize the impact of TDL

increase, including, among other things, the following:

1. Conducting energy mix in electrical power by utilizing

relatively low cost primary energy such as gas.

2. Achieving production efficiency by utilizing TDL as

optimum as possible.

Regional Impact

Further analysis is to identify the geographical impact of TDL

increase. Figure 32 shows 10 provinces most affected by

output decrease.

Electricity intensive

sectors will suffer

from the greatest

impact


It has been identified that provinces severely hit by TDL

increase are those characterized as electricity-intensive

provinces as they have vast industrial areas (for example DKI

Jakarta, West Java and East Java). Decrease of outputs is also

experienced by provinces with a high electricity demand (for

example East Kalimantan and Bangka Belitung).

Figure 32. Regional Impact: 10 Provinces with the highest Output decrease. The majority of

Provinces requiring high level of electrical energy due to the dense population and vast industrial

areas will be most affected by output decrease. (Source: Bank Mandiri Calculation).

No. IndicatorImpact

(%)

Electricity Share

(%)

1 DKI Jakarta -1.21 15.00

2 Banten -0.38 13.40

3 East Kalimantan -0.27 1.50

4 Bangka Belitung -0.23 0.20

5 West Java -0.21 23.10

6 Riau -0.07 1.00

7 South Sumatra -0.07 1.30

8 Nanggroe Aceh Darussalam -0.05 0.30

9 Central Java -0.05 8.20

10 East Java -0.05 21.00

Figure 33. Regional Electrification Ratio. The majority of provinces in Indonesia have been able

to reach the electrification ratio above 60.0% and are expected to be able reach the level of

100.0% in a few years ahead. Eastern Indonesia regions remain at a relatively lower

electrification ratio due to poor electricity infrastructure in these regions.

(Source: DGE&EU, 2008)

NAD

74.9%

North

Sumatera

69.3%

West

Sumatera

68.7%

Riau + Kepri

54.6%

South

Sumatera

49.8%

Bengkulu

50.1%

Bangka Belitung

72.5%

Lampung

47.6%

DKI Jakarta

100%

Banten

72.1%West

Java

64.9%

Central

Java

70.6%

Jambi

48.8%

Jogya

79.6%

East

Java

71.1%

Bali

74.4%

NTB

31.9%

NTT

24.3%

West

Kalimantan

45.5%

Central

Kalimantan

44.3%

South

Kalimantan

71.4%

East

Kalimantan

68.4%

North

Sulawesi

66.6%

Gorontalo

48.7%

Central

Sulawesi

47.6%

Southeast

Sulawesi

38.2%

South

Sulawesi

54.9%

North

Maluku

47.8%

Maluku

55.4%

Papua + West Papua

32.1%


Provinces with poor electricity infrastructure and low

electrification ratio such as Riau (electrification ratio: 54.6%)

and South Sumatra (electrification ratio: 49.8%) also suffer

from the negative impact of TDL increase.

It has also been identified that provinces with a larger share of

electricity use will also suffer from the impact of significant

output decrease such as DKI Jakarta, Banten and West Java

with the electricity portion of 15.0%, 13.4% and 23.1%,

respectively. In total, the change of output will occur in all

provinces (30 provinces) with an average decrease of 0.06%.

Many provinces in Java Island are under the pressure of TDL

increase due to the higher composition in Java Island

compared to outside Java. In 2009, the value of electricity

consumption in Java Island reached IDR67 trillion, far above

the electricity consumption in Java Island which only

amounted to IDR22 trillion. Therefore, out of the 10 provinces

suffering from output decrease, 5 of them are in Java Island.

Figure 34. Regional Electricity Consumption. The electricity consumption from year to year

remains concentrated in Java Island reaching IDR67 trillion in 2009. There has been a rather

significant difference between electricity use in Java Island and outside Java. This indicates as

inequitable distribution of electricity use in Indonesia. (Source: CEIC).

(IDRbn)

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

2005 2006 2007 2008 2009

Total Java Outside Java


Based on the abovementioned, the conclusions can be made:

1. Electricity has not been equitably distributed in every

province in Indonesia. The low electrification ratio in

several regions indicates that the electricity system in

Indonesia has not been fully integrated with the

transmission network. In meeting a higher electricity

demand, the Government should be able to take

comprehensive measures and to work hard in order to

materialize the electricity infrastructure project in order to

continue meeting the need for electricity.

2. The plan for TDL increase by 10.0% in July 2010 will have

a potentially negative impact on economic growth. In the

aggregate, output will drop due to the increase of the

companies’ cost of production and decrease in supply.

Inflation will rise by 0.27%. The increase in the level of

price will also lead to a decrease in the real wages of

manpower.

3. TDL increase will also lead to a decrease in the industrial

sector down. The income generated by most of the

companies will decrease due to the increase of goods and

service production cost. The negative impact of TDL

increase on the economy may be reduced by creating a

more favorable business climate. The Government should

gradually disseminate information to industrial actors to

anticipate any potential problems arising from basic

electricity tariff increase.

4. Provinces with high level of electricity consumption will

be under pressure. As a result of TDL increase, the income

of provinces requiring a large amount of electricity energy

because the regions have high industrial potentials and

high household electricity consumption will decrease.

The electricity industry in Indonesia has significant business

potentials. Energy emergency conditions must also be

addressed immediately by way of increasing electricity supply

(shortage) and accelerating the rate of domestic energy

supply. Similar to the issues faced by other sectors,

regulations remain the critical source of bottleneck.

Therefore, we must seek solutions for the electricity problem

in Indonesia from the aspect of both supply and demand.

Production obstacles can be overcome by adopting the market

mechanism in electricity pricing and improving regulations.


From the aspect of demand, market absorption can be

maintained by gradually increasing price to adapt to industrial

and household development.

The tariff policy is stipulated according to the economic value;

however it also has to take into account the consumers’ ability

to pay. Policy on the provision of subsidies for electricity tariff

remains applicable, although bearing in mind limited

Government capacity, subsidies will be more directly directed

at the poor consumer groups and or toward the development

of isolated regions by taking into account or prioritizing rural

areas/regions and community qualified to receive electricity

subsidies in the context of promoting the public economy.

Policy on non-uniform tariffs may be applied in the future.

This is related to the different levels of progress in electricity

development made by each region. The government needs to

implement this policy gradually so that the applicable price

can be more visibly reflected in the production. In the short

term, this policy may appear to be advantageous however, it

can be expected to bring greater benefit in the long term.


2004 2005 2006 2007 2008 2009 2010(f) 2011(f)

National Output (Summary)

Real GDP (% yoy) 5.1 5.7 5.5 6.3 6.1 4.6 5.8 6.3

GDP (Rp tn) - nominal 2,296 2,774 3,339 3,951 4,951 5,613 6,663 7,961

GDP (US$ bn) - nominal 256 285 364 432 511 540 731 886

GDP per capita (US$) - nominal 1,181 1,298 1,641 1,922 2,242 2,339 2,953 3,338

National Output (By Expenditure), % yoy

Domestic Demand (% yoy) 8.0 5.0 4.5 6.0 7.4 5.5 6.9 7.2

Real Consumption: Private (% yoy) 5.0 4.0 3.2 5.0 5.3 4.9 5.2 5.3

Real Gross Fixed Capital Formation (% yoy) 14.7 10.8 2.9 9.2 11.7 3.3 8.6 10.7

Government Expenditure (% yoy) 4.0 6.6 9.6 3.9 10.4 15.7 12.8 9.5

National Output (By Sector), % yoy

Agriculture, Livestock, Forestry and Fisheries (ALFF) 2.8 2.7 3.4 3.5 4.8 4.1 3.4 3.9

Mining and Quarrying (4.5) 3.2 1.7 1.9 0.7 4.4 3.2 2.7

Manufacturing Industries (Mfg) 6.4 4.6 4.6 4.7 3.7 2.1 3.9 5.0

Electricity, Gas and Water Supply 5.3 6.3 5.8 10.3 10.9 13.8 7.2 14.9

Construction 7.5 7.5 8.3 8.5 7.5 7.1 7.3 8.0

Trade, Hotel & Restaurant 5.7 8.3 6.4 8.9 6.9 1.1 8.9 6.2

Transport and Communication 13.4 12.8 14.2 14.0 16.6 15.5 11.7 15.0

Financial, Ownership and Business 7.7 6.7 5.5 8.0 8.2 5.1 5.1 6.4

Services 5.4 5.2 6.2 6.4 6.2 6.4 5.5 6.2

2004 2005 2006 2007 2008 2009 2010(f) 2011(f)

External Sector

Exports (%yoy,US$) - Merchandise 17.2 19.7 17.3 13.1 22.0 (15.0) 24.2 19.1

Imports (%yoy,US$) - Merchandise 42.9 24.0 6.7 21.8 40.7 (25.0) 40.3 24.9

Trade Balance (US$ bn) 20.2 17.5 29.7 32.8 22.9 35.2 30.2 29.1

Current Account (% of GDP) 1.2 0.3 2.6 0.4 (0.1) 1.9 0.9 0.3

Current Account (US$ bn) 1.6 0.3 10.9 10.5 0.1 10.7 7.0 2.6

External Debt (% of GDP) 55.3 47.3 36.4 32.7 30.4 32.5 24.5 20.2

International Reserves (US$ bn) 36.3 34.7 42.6 56.0 51.6 66.1 80.0 83.0

Import cover (months) 7.3 5.3 5.6 7.1 4.9 8.5 7.6 6.4

Rp/US$ (period average) 8,985 9,751 9,167 9,139 9,694 10,399 9,112 8,986

Rp/US$ (year end) 9,290 9,830 9,020 9,400 11,120 9,400 8,927 9,083

Oil Price (WTI, Average, US$/barrel) 42 57 66 72 100 62 85 90

Other

BI rate (% period average) 7.4 9.2 11.9 8.6 8.7 7.1 6.6 7.5

BI rate (% year end) 7.4 12.8 9.8 8.0 9.3 6.5 7.0 7.5

Headline Inflation (% yoy) 6.4 17.1 6.6 6.6 11.1 2.8 5.9 6.6

Fiscal Balance (% of GDP) (1.2) (0.9) (1.1) (1.3) (0.1) (1.6) (1.4) (1.5)

S&P's Rating - FCY B+ B+ BB- BB- BB- BB- BB+ BBB-

S&P's Rating - LCY BB BB BB+ BB+ BB+ BB+ BBB- BBB-

MACRO ECONOMIC INDICATORS AND FORECAST


INDONESIA CURRENT DATA

July Ags Sep Okt Nop Des Jan Feb Mar Apr

Exchange Rate

End of Period IDR/USD 9393 10900 9950 10113 9663 9585 9468 9390 9348 9335 9100 9013

Average IDR/USD 9354 1167 10119 10001 9857 9491 9464 9462 9284 9344 9167 9029

Monetary Sector

Base money M0, eop IDRtn 379.58 344.69 322.85 324.66 354.30 364.87 376.94 402.12 384.18 380.14 374.41 385.43

Narrow money M1 IDRtn 450.06 456.79 471.17 490.13 490.02 485.54 495.06 515.82 494.70 496.53 494.90

Broad Money M2 IDRtn 1,649.66 1,883.85 1,963.18 1,995.29 2,018.03 2,021.52 2,062.21 2,141.38 2,108.86 2,066.48 2,082.09

Outstanding Loan IDRtn 995.11 1,313.87 1,340.87 1,368.19 1,369.49 1,381.88 1,403.80 1,446.81 1,414.26 1,436.35

Outstanding Deposit IDRtn 1,459.44 1,673.82 1,759.57 1,794.26 1,807.06 1,815.05 1,849.57 1,914.11 1,861.46 1,854.12 1,876.04

1-month SBI rate % p.a 8.00 10.95 6.77 6.59 6.52 6.48 6.48 6.46 6.45 6.42 6.37 6.20

Lending rate (working capital) % p.a 13.00 15.22 14.45 14.30 14.17 14.09 13.96 13.69 13.75 13.68 13.54

3-month deposit rate, eop % p.a 7.42 11.97 8.54 8.03 7.85 7.18 7.03 6.85 7.33 7.14 7.09

Overnight rate, eop % p.a 4.50 9.40 6.57 6.19 6.36 6.39 6.48 6.24 6.24 6.15 6.15 6.17

Prices

Headline CPI (2007=100) Index 155.5 113.86 114.61 115.25 116.46 116.68 116.65 117.03 118.01 118.36 118.19 118.37

Year on year inflation rate % 6.59 11.06 2.71 2.75 2.83 2.57 2.41 2.78 3.72 3.81 3.43 3.91

Month on month inflation rate % 1.1 -0.04 0.45 0.56 1.05 0.19 -0.03 0.33 0.84 0.30 -0.14 0.15

Year to date inflation rate % N/A 11.06 0.66 1.22 2.28 2.48 2.45 2.78 0.84 1.14 0.99 1.15

Wholesale Price Index (2000=100) Index 217 238.0 163 165 167 164 165 166 167 167 168

Trade

Export USDbn 10.86 8.69 9.68 10.54 9.84 12.24 10.78 13.35 11.60 11.20 12.63

Oil USDbn 2.51 1.24 1.49 1.65 1.75 2.11 2.34 2.50 2.34 2.18 1.98

Non oil USDbn 8.36 7.45 8.20 8.89 8.09 10.13 8.44 10.85 9.25 8.99 10.65

Import USDbn 6.81 6.29 8.68 9.71 8.52 9.47 8.81 10.33 0.95 0.95 1.10

Oil USDbn 2.39 0.98 1.84 1.52 2.37 1.92 1.83 2.10 0.20 0.21 0.23

Non oil USDbn 4.42 5.31 6.85 8.19 6.15 7.55 6.98 8.22 0.76 0.74 0.88

Trade Balance USDbn 4.06 2.40 1.00 0.84 1.33 2.78 1.96 3.02 10.64 10.25 11.53

Output

GDP (current price) IDRtn 1034.86 1274.29 1459.80 1450.82 1498.72

GDP (constant price at 2000) IDRtn 493.37 518.94 561.00 547.54 558.12

Real Growth % YoY 5.88 5.20 4.16 5.43 5.69

Capital Market

JCI Index, eop Index 2745.83 1355.41 2323.24 2341.54 2467.59 2367.70 2415.84 2534.36 2610.80 2549.03 2777.30 2971.25

Volume, avg shares mn 3155.65 1743.25 5304.81 6028.98 3769.08 4325.02 4287.63 3422.10 4462.40 3661.76 4350.70 5823.34

Value, avg IDRbn 4340.55 1454.61 4105.06 5405.14 3315.11 3896.65 3566.64 2332.42 3599.15 2711.71 3546.06 5030.07

Consumer Confidence Index 99.10 90.60 115.40 114.30 110.80 110.00 111.00 108.70 110.50 105.30 107.40 110.70

Indicators Unit2010

2007 20082009

Disclaimer: This material is for information only, and we are not soliciting any action based upon it. This report is not to be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. The information herein has been obtained from sources believed to be reliable, but we do not warrant that it is accurate or complete, and it should not be relied upon as such. Opinion expressed is our current opinion as of the date appearing on this material only, and subject to change without notice. It is intended for the use by recipient only and may not be reproduced or copied/photocopied or duplicated or made available in any form, by any means, or redistributed to others without written permission of PT Bank Mandiri Tbk. Additional information is available upon request. For further information please contact: Office of Chief Economist, Ph. (021) 524 5516/5272 or Facs. (021) 521 0430.


OOvveerrsseeaass OOffffiicceess

Hongkong Branch

7th

Floor, Far East Finance Centre

16 Harcourt Road, Hongkong

Tel: 852-2527-6611

Fax: 852-2529-8131

Singapore Branch

3 Anson Road #12-01/02, Springleaf Tower

Singapore 079909

Tel: 65-6213-5688

Fax: 65-6438-3363

Cayman Islands Branch

Cardinal Plaza 3rd

Floor

30 Cardinal Avenue, PO Box 10198,

Grand Cayman, KY1-1002, Cayman Islands

Tel: 1-345-945-8891

Fax: 1-345-945-8892

Bank Mandiri (Europe) Limited, London

Cardinal Court (2nd

Floor),

23 Thomas More Street

London EIW IYY, United Kingdom

Tel: 44-207-553-8688

Fax: 44-207-553-8699

Shanghai Representative Office

3401, Bank of China Tower

200 Yin Cheng (M) Road,

Pudong New Area, Shanghai, 200120

People’s Republic of China

Tel: 86-21-5037-2509

Fax: 86-21-5037-2507

Dilli Branch – Timor Leste

Avenida Presidente Nicolao Lobato

No.12, Colmera

Dilli – Timor Leste

Tel: +670-331-7777

Fax: +670-331-7190/74444

Mandiri International Remittance Sdn.Bhd.

Wisma Mepro, 29 & 31 Jalan Ipoh 51200 Kuala

Lumpur, Malaysia

Telp : +60-3-4045-988

HHeeaadd OOffffiiccee

Plaza Mandiri

Jl. Gatot Subroto Kav. 36-38

Jakarta 12190, Indonesia

Tel: (62-21) 526 5045 – 526 5095

Fax: (62-21) 526 8372 – 526 5008

Website: www.bankmandiri.co.id

Riswinandi

Deputy President Director

Tel: (62-21) 3002 3028, Fax: (62-21) 526 3617

Fransisca N. Mok

Director Corporate Banking

Tel: (62-21) 3002 3847, Fax: (62-21) 526 3617

Sunarso

Director Commercial Banking

Tel: (62-21) 3002 3087, Fax: (62-21) 526 3617

Budi Gunadi Sadikin

Director Micro & Retail Banking

Tel: (62-21) 3002 3079, Fax: (62-21) 252 1585

Thomas Arifin

Director Treasury & International Banking

Tel: (62-21) 3002 3763, Fax: (62-21) 526 3763

Abdul Rachman

Director Special Assets Management

Tel: (62-21) 3002 3839, Fax: (62-21) 252 4651

Ogi Prastomiyono

Director Compliance & Human Capital

Tel: (62-21) 3002 3666, Fax: (62-21) 252 4651

Sentot A. Sentausa

Director Risk Management

Tel: (62-21) 3002 3454, Fax: (62-21) 526 8213

Zulkifli Zaini

Director Technology & Operation

Tel: (62-21) 524 5580, Fax: (62-21) 252 1585

Pahala N. Mansury

Director Finance & Strategy

Tel: (62-21) 3002 3089, Fax: (62-21) 526 8213

Haryanto Budiman

EVP Coordinator Change Management Office

Tel: (62-21) 3002 3076, Fax: (62-21) 526 8213

Mansyur S. Nasution

EVP Coordinator Consumer Finance

Tel: (62-21) 3002 3075, Fax: (62-21) 5296 4116

Riyani T. Bondan

EVP Coordinator Internal Audit

Tel: (62-21) 3002 3722, Fax: (62-21) 526 3623

Documents

k Fhm 18424279