KEY HIGHLIGHTS OF INDONESIAN ECONOMY

Indonesia, officially the Republic of Indonesia, is a country in Southeast Asia.

Indonesia comprises of 17,508 islands with a population of around 238 million. It is
the world's fourth most populous country. The nation's capital city is Jakarta.
Indonesia is a founding member of ASEAN and a member of the G-20 major
economies.

On 13 July 2010, Japan Credit Rating Agency has upgraded Indonesia's investment
grade from BB+ to BBB. Indonesia has a market economy in which the government
plays a significant role. It is the largest economy in Southeast Asia and a member of
the G-20 major economies. Indonesia's estimated gross domestic product (nominal),
purchasing power parity aside for 2008 was US$539.7 billion with estimated nominal
per capita GDP was US$2,329, and per capita GDP PPP was US$4,157. The services
sector is the economy's largest and accounts for 45.3% of GDP (2005). This is
followed by industry (40.7%) and agriculture (14.0%). However, agriculture employs
more people than other sectors, accounting for 44.3% of the 95 million-strong
workforces. This is followed by the services sector (36.9%) and industry (18.8%).
Major industries include petroleum and natural gas, textiles, apparel, and mining.
Major agricultural products include palm oil, rice, tea, coffee, spices, and rubber.

Indonesia's main export markets (2005) are Japan (22.3%), the United States (13.9%),
China (9.1%), and Singapore (8.9%). The major suppliers of imports to Indonesia are
Japan (18.0%), China (16.1%), and Singapore (12.8%). In 2005, Indonesia ran a trade
surplus with export revenues of US$83.64 billion and import expenditure of
US$62.02 billion. The country has extensive natural resources, including crude oil,
natural gas, tin, copper, and gold. Indonesia's major imports include machinery and
equipment, chemicals, fuels, and foodstuffs.
Jakarta, the capital of Indonesia is the country's largest commercial center. In the
1960s, the economy deteriorated drastically as a result of political instability, a young
and inexperienced government, and economic nationalism, which resulted in severe
poverty and hunger. Following President Sukarno's downfall in the mid-1960s, the
New Order administration brought a degree of discipline to economic policy that
quickly brought inflation down, stabilized the currency, rescheduled foreign debt, and
attracted foreign aid and investment. Indonesia is Southeast Asia's only member of
OPEC, and the 1970s oil price raises provided an export revenue windfall that
contributed to sustained high economic growth rates. Following further reforms in the
late 1980s, foreign investment flowed into Indonesia, particularly into the rapidly
developing export-oriented manufacturing sector, and from 1989 to 1997, the
Indonesian economy grew by an average of over 7%.

Indonesia was the country hardest hit by the Asian financial crisis of 1997–98.
Against the US dollar, the rupiah dropped from about Rp. 2,600 to a low point of
14,000, and the economy shrank by 13.7%. The Rupiah has since stabilized in the Rp.
8,000 to 10,000 range, and a slow but significant economic recovery has ensued.
However, political instability, slow economic reform, and corruption at all levels of
government and business, have slowed the recovery. Indonesia was ranked 143rd out
of 180 countries in its Corruption Perceptions Index (2007). GDP growth, however,
exceeded 5% in both 2004 and 2005, and is forecast to increase further. This growth
rate, however, was not enough to make a significant impact on unemployment, and
stagnant wages growth and increases in fuel and rice prices have worsened poverty
levels. As of 2006, an estimated 17.8% of the population was living below the
poverty line, defined by the Indonesian government as purchasing power parity of
US$1.55 per day (household income). According to the 2006 estimates, nearly half of
the population was living on less than US$2 per day. However, the national economy
has grown strongly again since 2007 with an average 6%, and it has helped the
unemployment rate decline to 8.46% in 2008, and in comparison to its neighbors,
Indonesia has been less affected by the 2008 global recession.
FINANCIAL CRISIS

In June 1997, Indonesia seemed far from crisis. Unlike Thailand, Indonesia had low
inflation, a trade surplus of more than $900 million, huge foreign exchange reserves
of more than $20 billion, and a good banking sector. But a large number of
Indonesian corporations had been borrowing in U.S. dollars. During the preceding
years, as the rupiah had strengthened respective to the dollar, this practice had worked
well for these corporations their effective levels of debt and financing costs had
decreased as the local currency's value rose.

In July 1997, when Thailand floated the baht, Indonesia's monetary authorities
widened the rupiah trading band from 8% to 12%. The rupiah suddenly came under
severe attack in August. On 14 August 1997, the managed floating exchange regime
was replaced by a free-floating exchange rate arrangement. The rupiah dropped
further. The IMF came forward with a rescue package of $23 billion, but the rupiah
was sinking further amid fears over corporate debts, massive selling of rupiah, and
strong demand for dollars. The rupiah and the Jakarta Stock Exchange touched a
historic low in September.

Although the rupiah crisis began in July and August 1997, it intensified in November
when the effects of that summer devaluation showed up on corporate balance sheets.
Companies that had borrowed in dollars had to face the higher costs imposed upon
them by the rupiah's decline, and many reacted by buying dollars through selling
rupiah, undermining the value of the latter further. In February 1998, President
Suharto sacked Bank Indonesia Governor J. Soedradjad Djiwandono, but this proved
insufficient. Suharto resigned under public pressure in May 1998 and Vice President
B. J. Habibie was elevated in his place. Before the crisis, the exchange rate between
the rupiah and the dollar was roughly 2,600 rupiah to 1 USD. The rate plunged to
over 11,000 rupiah to 1 USD in January 1998, with spot rates over 14,000 during
January 23–26 and trading again over 14,000 for about six weeks during June-July
1998. On 31 December 1998, the rate was almost exactly 8,000 to 1 USD. Indonesia
lost 13.5% of its GDP that year.
MACRO ECONOMIC VARIABLES
Indonesia is a multinational country, which has given the economy a serious
advantage over other countries. However, this country has ongoing challenges
specific to the world financial crisis. Even so, Indonesia has seen a declining public
debt to Gross Domestic Product or GDP, as well as solid stewardship over the past
few years that have helped the growth of the GDP. Some of the areas in specific that
have experienced improvement include use of treasure bills, taxation, capital market
supervision, and customs. Although the government of Indonesia has worked hard to
create deeper and broader capital markets, the non-bank financial sector, which
includes areas of insurance and pension investment continue to struggle. During the
financial crisis, Indonesia was hit hard but now, reduced prices for commodities has
allowed for noted economic growth and officials are optimistic the future will be
brighter.

GROSS DOMESTIC PRODUCT (GDP)

The economy of Indonesia depends heavily on domestic consumption but the

financial crisis that affected the rest of the world hit this country hard in 2007 and
2008. While Indonesia had serious problems at this time, higher growth rates were
actually recorded during this time when looking at the other G20 members along with
China and India. The result was the Indonesia GDP (Gross Domestic Product, Current
Prices, US Dollar) for 2008 closed at $511.49 billion in US dollars. From the end of
2008 to the end of 2009, a slight increase of 5.45% was seen, which put year-end
numbers for 2009 at $529.377 billion placing the country in the number 18 position
for world rankings. Then looking out to the end of 2010, current forecasts are that
another increase will be seen of 24.30%, putting the US dollar figure at $670.42 (in
billions). By 2015, experts suggest a significant increase, which would push the GDP
to $1,172.10 billion in US dollars.

UNEMPLOYMENT
The Indonesia population is estimated around 240.3 million, putting the country as the
fourth most populated in the world. Keep in mind that people work on just 6,000 of
the 18,110 islands of which Indonesia is comprised but some of these offer no real
income. Workers are involved primarily with natural resources to include petroleum,
natural gas, nickel, bauxite, timber, tin, coal, gold, silver, copper, and fertile soil.
Employment has improved with the Indonesia unemployment rate around 7.7%, a
reduction from the previous year of 8.4%.

INFLATION RATE

Now, when looking at the Indonesia inflation rate, forecasters use data from each year
being forecasted rather than end-of-period, based on an index of 2000=100 for
average consumer prices. For instance, in 2009, the rate was at 4.814%, a significant
decline of just over 50% from the previous year that closed at 9.78%. The same data
along with historical numbers are used to forecast future years. As an example, for
2010 and 2015, experts state the years will end at 4.72% and 4.196% respectively.

CURRENT ACCOUNT BALANCE

Forecasters also determine the Indonesia current account balance, which uses
classifications for current transfers, goods, services, and income. In this case, the
focus is on transactions for Indonesia versus what the rest of the world is doing. The
closing numbers for 2008 were at 0.13 billion in US dollars, which experienced an
increase of 8.00% so 2009 closed at $10.581 billion. At that time, Indonesia had a
number 19 ranking worldwide. The for the 2010 forecast, experts expect to see the
current account balance at $9.48 billion and by the end of 2015, the numbers will hit
around a negative $13.233 billion.

WHOLESALE PRICE INDEX

The wholesale price for a commodity is the price of transactions taking place between
the first wholesaler and the next largest trader for large quantities on the first market
for a commodity. In other words, index that measures and tracks the changes in price
of goods in the stages before the retail level. Although some countries still use the
WPIs as a measure of inflation, many countries, including the United States, use the
producer price index (PPI) instead. The wholesale price indexes used in Indonesia
were originally set up in 1996; the base year was reset in April of 2006 with a WPI
value of 2000. Index values in Indonesia are commonly expressed as 2000=100.

The Changes of The Wholesale Price Indices (WPI) of Indonesia

and Share of August 2010 by Sector (2005=100)

SECTOR WPI WPI CHANGE OF SHARE OF

WPI WHOLESALE
JULY, 2010 AUGUST, PRICE
2010 INFLATION
AUGUST
2010

AGRICULTURE 23343 23664 138 040

MINING & 21202 21263 029 001

QUARRYING

INDUSTRY 17170 17247 045 020

IMPORT 15980 15937 -027 -002

WITHOUT OIL
& GAS

EXPORT 14292 14254 -027 -002

WITHOUT OIL
& GAS

GENERAL 17387 17486 057 057

WITHOUT OIL
& GAS

CONSUMER PRICE INDEX

When we talk about the rate of inflation in Indonesia, this often refers to the rate of
inflation based on the consumer price index, or CPI for short. The Indonesian CPI
shows the change in prices of a standard package of goods and services which
Indonesian households purchase for consumption. Most recent CPI index of Indonesia
is 6.327%.

GRAPH CPI LAST YEAR GRAPH CPI LONG TERM

FAST FACTS

Average Life Satisfaction 5.5/10 (2009)

Population 234.6 million (2010)

GDP per capita (PPP) 4380 (2010)

GDP (PPP) 1027.3 (2010)

Political System Republic (2010)

Freedom House Rating Free (2010)

Literacy Rate 92% (2006)

Life Expectancy 71 years (2008)

Business Start-up Costs 26%

(% of Gross NI)
ABOUT RUPIAH
The rupiah has been subject to high inflation for most of its existence. Various
attempts have been made to maintain the value of the currency, all were abandoned.

Revolutionary Period (1946–1949)

In the period from October 1946 to March 1950 Indonesian currency had no
international recognition. Its value was determined on the blackmarket.

Foreign Exchange Restrictions (1949–1965)

The exchange rate determined upon independence in 1949 was 3.8 rupiah to 1US$.
Lembaga Alat-Alat Pembajaran Luar Negeri Publication #26 of March 11, 1950
(effective March 13) established the Foreign Exchange Certificate System. By the
trade in certificates an export rate of 7.6rp and an import rate of 11.4rp was
established.

The FECS was scrapped on 4 January 1952, by which time the government had been
able to reduce its deficit by 5.3 billion rupiah through the exchange differential. The
system was scrapped because domestic prices were being determined by the import
rate, which were hurting profits from exports earned at the lower rate. Hence the
effective 7.6/11.4rp exchange rate reverted to 3.8rp.

The ending of what amounted to an export tariff severely damaged government

revenues, and as of 4 February 1952, the rupiah was officially devalued to 11.4rp,
with export tariffs of 15-25% on commodities that Indonesia was strong in. Weaker
commodities were not subject to tariffs, and from 1955 were actually given a
premium of 5-25% to boost their export.

In order to control foreign exchange, the government brought in a number of

measures. 40% of the foreign exchange requirements of importers were required to be
paid to the government from April 1952, while as from September 1952 the
government decided to provide only a limited amount of foreign exchange, made
available every four months. These foreign exchange restrictions, designed to provide
the government with much needed reserves meant that some companies were
operating at as low as 20% of capacity, due to lack of needed imported materials.
Further foreign exchange restrictions were introduced over 1953–1954, with April
1953, the foreign exchange down payment was increased to 75%, except for raw
materials at 50%. Foreign companies and their workers were placed under restrictions
as to the amount of foreign exchange that could be sent home, with the amounts
allowed out subject to fees of 66⅔%. As of November 1954, exporters were required
to sell 15% of their foreign exchange earned to the government.

The currency devaluation of large notes in 1959 saw the official exchange rate
devalued to 45rp as of August 1959. Despite this, the fundamental issues with the
fixed exchange rate system and severe import controls (which saw cotton mills
running at only 11% of capacity due to lack of imported raw materials) were not
addressed, and smuggling grew, often backed by the army, while assets were moved
offshore by over invoicing.

The government maintained price controls over goods and raw materials, with the
official oil price unchanged 1950–1965.

After the 1959 devaluation, inflation, which had been running at a relatively high
25% per annum 1953–1959 really took off, with rates over 100% in 1962, 1963, and
1964, and 600% in 1965. Despite the official 45rp to 1 US$ rate, two further export
certificate trading systems, of March 1962 - May 1963, and then from April 1964
onwards, showed premiums of 2,678% July 1962 (1205rp effective rate), 5,100%
August 1965 (2295rp) and 11,100% in November 1965 (4995rp).

Stabilization and Growth (1966–1971)

The last demonetization of rupiah notes occurred in late 1965, at which time inflation
was ravaging the economy: exports had dropped 24% (1959–1965). GDP growth was
below population growth, and the foreign exchange reserves had fallen by over 90%.
Inflation in 1965 was 635%. In late 1965, the 'new rupiah' was brought in, at 1000 to
1 to the old currency. The official exchange rate was set initially at 0.25rp to 1 US$ as
of 13 December 1965, a rate that did not represent reality, as the multiple exchange
rate system remained in place for the time being.

On November 1966, Suharto made economic changes, establishing his ‘New Order’
with US-educated neoclassical economists. Economic policies were put in place to
require adequate bank reserves, ending subsidies on consumer goods, end import
restrictions, and to devalue the rupiah.

The 1966–1970 stabilization program was a great success, resulting in higher

economic growth, boosting legal exports (which grew 70% in US$ terms over the
period), and increasing output (for instance the price of oil rose 250 times when the
1950 prices were abandoned, incentivizing new exploration). By 1971 inflation had
fallen to just 2%.

Despite the liberalisation efforts, Indonesia still had multiple exchange rates. A more
realistic exchange rate was finally established of 378 (new) rupiah to 1 US$ as of
April 1970. In August 1971 the exchange rate was devalued slightly, to 415rp to the
US$.

Fixed Rate Period (1971–1978)

The 415 rupiah exchange rate to the US dollar, which had been established in August
1971 was fixed by government intervention in the currency market, buying and
selling currency as needed.

Despite the fixed rate, the failure of the rice crop in 1972, exacerbated by high world
rice prices, and under ordering by the government rice cartel, along with rising
commodity prices caused inflation to rise above 20% in 1972, peaking at over 40% in
1974. Despite the high inflation of the period, the exchange rate, which had
essentially been preserved using the country's oil exports, was maintained at 415
rupiah until 15 November 1978.

Managed Float period (1978–1997)

1978–1986 Devaluations

By 1978, the combination of a fall in oil prices and a decrease in foreign reserves
meant that the rupiah was devalued 33% to 625rp to 1 US$ on 16 November 1978.

The government abandoned the fixed exchange rate, and altered economic policy to a
form of a managed float. The exchange rate was published each day. At the point of
devaluation (November 1978), the trade-weighted real (local price adjusted) effective
exchange rate (REER) of the rupiah against major world currencies was just over
twice as high as it was in 1995 (prior to the Asian economic crisis, and free fall of the
rupiah), i.e. the rupiah was highly overvalued at this point. By March 1983, the
managed float had brought only an 11% fall in three and a half years to 702rp.

The continued overvaluation of the rupiah meant that Indonesia was beginning to
suffering a trade deficit, as well as falling foreign exchange reserves. The government
responded by devaluing the currency on 30 March by 28% to 970rp.

At this time the 1980s oil glut put the Indonesian economy was under pressure, with
exports uncompetitive as a result of the overvalued currency, and oil contributing less
as a result of lower global prices. On 1 June 1983, 'Pakjun 1983' brought deregulation
of the banking system, and the end of the meaningless 6% official deposit rate, with a
more market-based financial system. Credit ceilings were removed. Interest rates,
initially 18%, remained above 15% over the period.

By September 1986 the currency had been allowed to steadily fall to 1134 rupiah, a
rate which had largely maintained purchasing power over the period. Despite this, the
currency was devalued 30% on 12 September 1986 to 1664 rupiah to 1 US$. As in
1983, this had been intended to boost the balance of trade: oil prices, $29 in 1983, fell
by 50% in 1986 alone, to below $9 per barrel.

Thus in the period from 1978 to 1986, the real exchange rate of the Indonesian rupiah
fell by more than 50%, providing significant boosts to the competitivity of Indonesia's
exports.

October 1986-June 1997: US$ Real Exchange Parity

Although the devaluations of 1978, 1983 and 1986 had each successfully boosted the
competitiveness of exports, devaluations have a destabilizing effect, and the
September 1986 devaluation was the last carried out by Indonesia.

Since the 1986 devaluation, the currency maintained near-constant purchasing power
against the dollar up until the 1997 crisis. By June 1997 the rupiah had fallen from its
post-devaluation rate of 1664rp to 2350rp, an annualized decline of slightly over.