Indonesia Chartbook by Bank Danamon

See the Disclosure Appendix for the Analyst
Certification and Other Disclosures
Indonesia 2010 and 2011 Economic Outlook

How far can we go?
29 September 2010
Anton Gunawan Helmi Arman Anton Hendranata

Chief Economist Economist / Bond Strategist Economist / Econometrician
anton.gunawan@danamon.co.id helmi.arman@danamon.co.id anton.hendranata@danamon.co.id
+62 21 5799-1466 +62 21 5799-1563 +62 21 5799-1563
+62 21 5799-1001 ext 1095 +62 21 5799-1001 ext 1128 +62 21 5799-1001 ext 1128
Danamon Economic and Market Research | Please read the disclaimer on the back of this report 1
Economic highlights
• The 2011 GDP growth outlook still looks sanguine; non-food spending may
continue to rise.
• The recent rise in inflation has been mainly limited to food and administered
prices; next year the core may also rise and we expect BI would raise the
BI rate to 7.50%.
• However BI’s latest reserve requirement regulation buys time to keep the BI
rate constant at least until 2Q11.
• Signs of fast decline in the current account surplus may leave the balance
of payments (hence exchange rate) more dependent on capital flows.
• Next year we expect a flat trend for the IDR/USD with a bias for
depreciation (YE11 forecast: Rp9,150/US$).
• Until year-end 2010, reduced bond supply from MOF and strong offshore
real money flows may keep long-end yields suppressed.
Real sector developments and outlook
• Non-food spending (durable and non-durable) has been
rising…
• …this may continue as long as consumer confidence is

maintained and inflation well-managed.
• Unfortunately growth in the manufacturing sector has been

lagging and remains limited to several industries.
Indonesia 2Q10 GDP: Some interesting trends
Non-food consumption growth rising Higher discretionary spending
Investment growth accelerating Construction, imported machinery,

transportation equipment
But government consumption shrinking large fiscal surplus in 2Q10
Broad-based demand Household consumption: Food vs. non-food

7.0 % y-o-y % y-o-y 20 8
GDP growth %
Election effect
6.5 Exports 15
7
10
Non-food
6.0 Investments 6
(RHS) 5
5.5 5
0
5.0 4 Food
-5
4.5 3
-10
4.0 -15 2
3.5 -20 1
Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10
Source: BPS, CEIC Source: BPS, CEIC
Retail and durable goods sales: Sky still clear
BI retail sales index: Selected items BI retail sales index: Selected items
500 Oct '00 = 100 500 Oc t '00 = 100
450 450
400 400
350 350
300 300
250 250
200 200
150 150
100 100
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10
Handy craf ts, Arts & Toy s F ood and Tobacco H andy craf ts , Arts & Toy s F ood and Tobac c o
Apparels W riting Equipm ent Apparels W riting Equipm ent
Passenger car sales Motorcycle sales: Astra

400 % chg y-o-y
80 % chg y-o-y
300 60
40
200
20
100
0
0
-20
Source: CEIC
-100 -40
Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10
Sedan MPV: < 1.5 liter SUV: 1.5 to 3.0 liter Source: CEIC
But sunshine not so bright in goods-producing sectors
• By industry, growth focused on services-related sectors e.g. wholesale

& retail trade and communication.
• Manufacturing sector growth: modest and narrow based

– Negative y-o-y growth: Textiles, wood & forestry, paper & printing,
basic metals
By industry, growth was focused on services sectors Manufacturing (non-oil and gas): Back to sub-par growth
10 % y-o-y Services 9 % y-o-y
8
8
Manufacturing 7
6 Non-oil-and-gas
6 Manufacturing
4 5
4
2
Primary
3
Commodities
0
2
-2 Data uses 2000p base year fromMar-04 1

Dec-02 Dec-04 Dec-06 Dec-08 Dec-10 Jun-02 Jun-04 Jun-06 Jun-08 Jun-10
GDP by Industry breakdown: The red and green sectors
• Stable agriculture sector

growth
• Mining growth dragged

down by Oil & Gas
• Manufacturing growth
concentrated in the
vehicles/machinery
chemicals, and
construction related
• Non traded sector

(utilities, infrastructure,
trade and services) growth
more dominant
Non-traded
sectors
External sector developments and outlook
• Export structure is becoming more natural resource dependent
and this trend may persist.
• Import growth will remain strong amid continued rise in

domestic demand and capital investment.
• Pace of trade balance deterioration should be closely watched

(risk of faster narrowing)!
Indonesia’s export structure:
• Long term trend: Increased importance of (especially) non-oil primary

commodity exports.
• A “double-edged sword”:
– + : Exports have lower import content
– - : Trade surplus becomes susceptible to commodity price swings
Primary commodity exports (non-oil & gas) Primary commodity exports (non-oil & gas)
40 % of total exports 55 % of total exports
35 Primary comm. exports 50

(ex-oil & gas) Primary commodity exports
30 45 (incl. oil and gas)
25 40
6MA
20 35
6MA
15 30
10 25
Incl: Rubber, w ood, coal, animal and veg. oils, metal ores 20
5
Source: BPS, CEIC, Danamon calculations Source: BPS, CEIC, Danamon calculations
Given IDR strengthening; is exports losing
competitiveness?
• Conventional competitiveness indicator shows mixed evidence.

• Trade-weighted and inflation-adjusted exchange rate (REER) shows IDR
5% stronger vs. pre-crisis peaks.
• However CPI-based REER distorted by high food inflation.
• PPI-based REER only 2% stronger vs. pre-crisis peaks.
Indonesia real effective exchange rate (CPI-based) Indonesia real effective exchange rate (WPI-based)
115 2006 = 100 100 2006 = 100
110 95 6-Country REER,

6-Country REER, CPI-based PPI/WPI bas ed
105 90
100 85
95 80
90 75
85 70
Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10
But non-commodity exports haven’t seen dramatic
adverse trend
Export growth of top 10 non-oil and gas items, 7M10 vs. 1Q10
1Q09 1Q10 % y-o-y
Mineral Fuels 2,233 4,747 113%
• Export growth generally
Vegetable and animal fats & oils 2,101 2,666 27% moderating (higher base effect)…
Electrical appliances / machinery 1,550 2,292 48%
Metal ores 1,160 1,978 71%
Rubber and rubber products 934 1,962 110%
• …but no dramatic decline in non-
Machinery 993 1,134 14% commodity exports seen yet.
Paper 757 955 26%
Copper 411 912 122%
Textiles 804 864 7%
• Dual speed export growth:
Aluminium 116 147 27% – Resource-based: 58% y-o-y
– Non-resource: 21% y-o-y
7M09 7M10 % y-o-y
Mineral Fuels 6,800 10,690 57%
Vegetable and animal fats & oils 5,614 6,698 19%
Electrical appliances / machinery 4,193 5,688 36%
Metal ores 2,956 4,350 47%
Rubber and rubber products 2,530 5,158 104%
Machinery 2,591 2,794 8%
Paper 1,850 2,349 27%
Textiles 1,938 2,088 8%
Copper 1,023 1,786 75%
Garments 1,448 1,636 13%
Source: BPS. Commodity exports are in bold
A closer look at exports of non-natural resources (1)
• Electrical appliances: Export value still rising…
• …but volume has been stagnant

– Price competitiveness issue?
– Industry capacity constraints?
Export volume: Electrical machinery and apparatus Export value: Electrical machinery and apparatus
55 Kg mn 500 US$mn
Export vol: Electrical Exports: Electrical
50 450 machinery and apparatus
machinery and apparatus
400
45
350
40
6MA 300 6MA
35
250
30
200
25 150
20 100
A closer look at exports of non-natural resources (2)
• Clothing exports: No strong uptrend; growth close to stagnant.
• Footwear exports: Some improvement, recently.
Export volume: Clothing and Footwear Export value: Clothing and Footwear
700 60
US$mn kg mn
Clothing (6MA) Clothing (6MA)
600
50
500
40
400
30
300
Footwear (6MA) 20 Footwear (6MA)
200
100 10
0 0
Trade balance a deficit in July amid non-oil import surge
• Imports charging on, triggering the first trade deficit since 2008.
• But this time, trade deficit was not triggered by a sharp deterioration of the
oil trade balance.
• What if the oil trade deficit worsens again? Subsidy reform is needed!
Indonesia foreign trade Indonesia oil trade balance

14000 US$mn Exports US$mn 4000 -0
US$mn
12000 3000 -500
Imports
10000 2000 -1000
8000 1000 -1500
Oil trade balance (deficit)

6000 0 -2000
Trade balance (RHS)
4000 -1000 -2500

Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10
Rising imports in Jun & Jul have been mostly from
capital goods imports
Indonesia imports: by category

• Although imports still dominated by raw 10000 US$mn
materials…
Raw Materials
8000
• …but surge in last two months driven 6000

more by capital goods imports.
4000
Capital Goods
• Consumption goods import growth is also
2000
strong, but this is from a low base. Consumer Goods
0
Jul-08 Jan-09 Jul-09 Jan-10 Jul-10
Source: BPS, CEIC
Indonesia import growth: by category

7M09 7M10 y-o-y Contribution to growth
Total 40,814 60,327 48% 100%
Consumption 3,625 5,593 54% 10%
Raw materials excl. oil & gas 26,553 39,854 50% 68%
Capital goods 10,635 14,881 40% 22%
Source: BPS
What capital goods?
• Aircraft imports Leasing mechanism Not lump-sum payment using US$

• Machinery imports Which industries are they going to?
Indonesia top 10 imports (non-oil and gas)

Jun-10 Jul-10 chg (US$mn)
Machinery / Mechanical apparatus 1,694 1,939 245
Electrical appliances and machinery 1,350 1,467 117
Iron and steel 631 586 (45)
Motor vehicles and parts 534 521 (14)
Organic chemiclas 461 427 (35)
Plastic and plastic products 426 464 38
Aircraft and parts 219 641 423
Metal products 316 315 (1)
Ships, vessels and floating structures 163 202 39
Cotton 196 232 36
Total top 10 categories 5,988 6,793 805
Others 3,382 3,721 338
Total non-oil and gas imports 9,371 10,513 1,143
Source: BPS
Which manufacturing industries are expanding capacity?
• In the sample, relatively strong increase in fixed assets seen in vehicle,

consumer, cement and–to some extent–footwear companies.
Increase in gross fixed assets of selected listed manufacturing companies (% y-o-y)

Company Industry / Business Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10
ASII Auto 15% 12% 12% 14% 18% 22% 27% 37% 34% 34% 30% 20% 18% 19%
UNVR Consumer 14% 16% 21% 27% 28% 26% 21% 17% 16% 16% 17% 21% 23% 29%
INTP Cement 3% 4% 4% 4% 3% 4% 4% 5% 5% 4% 3% 6% 5% 5%
SMGR Cement 1% 1% 1% 5% 6% 8% 8% 10% 10% 11% 18% 12% 13% 15%
INDF Consumer 13% 5% 7% 64% 65% 64% 64% 16% 18% 19% 19% 13% 12% 10%
CPIN Food 37% 15% 37% 23% 24% 22% 18% 16% 15% 12% 9% 6% 4% 5%
KLBF Consumer 14% 21% 19% 18% 20% 11% 12% 14% 12% 12% 11% 10% 11% 13%
SMCB Cement 2% 2% 2% 1% 1% 4% 8% 8% 8% 4% 0% 0% 0% 1%
AUTO Auto 22% -35% 19% 6% -4% 76% -1% 7% 11% 11% 8% 6% 8% 11%
INKP Pulp & paper -31% 13% 7% 7% 67% 6% 6% 9% 8% 5% 4% 2% 2% 2%
BRPT Chemicals -40% -5% -6% 1550% 1739% 1632% 1640% 25% 31% 9% 5% -13% -17% na
MYOR Consumer 6% 8% 9% 10% 11% 10% 16% 25% 25% 30% 26% 20% 21% 17%
IMAS Auto 20% 14% 14% 4% 2% 6% 10% 17% 15% 17% 15% -8% -7% -5%
TSPC Pharmaceutical 8% 8% 8% 14% 9% 9% 10% 11% 11% 11% 12% 9% 9% 8%
GJTL Tires & tubes 5% 11% 6% 7% 9% 5% 11% 11% 10% 8% 6% 5% 7% 7%
JPFA Animal feed 6% 8% 7% 7% 13% 11% 14% 19% 14% 6% 5% 8% 10%
FASW Pulp & paper 12% 6% 5% 2% 2% 2% 2% 1% 1% 1% 2% 2% 2% 4%
TKIM Pulp & paper 284% 2% 2% 4% 4% 5% 5% 6% 4% 5% 3% 1% 2% 2%
AMFG Glass 6% 5% 156% 5% 5% 4% 8% 5% 11% 14% 15% 16% 10% 7%
TCID Consumer 19% 17% 15% 10% 14% 7% 21% 20% 18% 23% 8% 9% 4% 4%
BUDI Chemicals 18% 21% 21% 26% 24% 18% 19% 10% 12% 10% 8% 7% na na
ADMG Textile 2% 1% 0% 2% 1% 1% 2% 0% 2% 0% -1% 2% 0% 2%
BATA Footwear 4% 3% -53% -9% -6% -9% 171% 48% 49% 68% 25% 21% 7% 13%
INDR Textile 6% na na na 7% 6% 6% 4% 2% 0% -1% 0% 0% 0%
CNTX Textile na na na na na na na na 110% 104% 59% 89% -3% -25%
POLY Textile 0% -60% 0% 0% 0% 150% 0% 0% 0% 0% 0% 0% 0% 0%
Source: Bloomberg, Danamon calculations
Across non-manufacturing sectors, capacity expansion
appears to be broader-based
• On average, pace of capacity expansion appears to have been broader

across resource-based & services sector companies.
Increase in gross fixed assets of selected listed resource based / services sector companies (% y-o-y)
Company Industry / Business Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10
TLKM Telecom 22% 35% 20% 17% 13% 12% 14% 15% 15% 16% 14% 12% 11% 9%
EXCL Telecom 33% 34% 39% 42% 44% 45% 48% 45% 38% 26% 14% 8% 6% 7%
AALI Plantations 18% 19% -21% -20% -30% 24% 84% 77% 120% 23% 24% 25% 20% 21%
ISAT Telecom 19% 17% 18% 22% 25% 27% 25% 24% 26% 24% 25% 18% 12% 8%
JSMR Toll-road na na na na na na na na 13% 12% 14% 14% 16% 17%
LSIP Plantations 16% 8% 10% 22% 35% 32% 28% 15% 14% 13% 14% 14% 12% 11%
ADRO Coal na na na na na na na na na na na 8% -1% -1%
UNTR Heavy Equipment 19% 12% 12% 17% 32% 42% 48% 55% 41% 43% 39% 28% 24% 23%
INCO Nickel 3% 3% 3% 5% 5% 5% 6% 7% 8% 8% 7% 5% 5% 5%
ITMG Coal na na na na na na na na 17% 15% 14% 13% 12% 11%
PTBA Coal 2% 2% 2% 2% -73% 1% 1% 5% 354% 22% 22% 17% 3% 4%
BUMI Coal 12% 8% 6% 3% 4% 6% 14% 25% 31% 31% 28% 19% 11% 11%
INDY Coal na na na na na na na na na na 1499% 1376% 1244% na
RALS Retail 24% 15% 15% 17% 20% 25% 23% 24% 21% 20% 15% 11% 13% 15%
BTEL Telecom 30% 30% 79% 85% 84% 93% 43% 57% 58% 92% 93% 73% 69% 28%
MNCN Media na na na na na na -45% 23% 24% 19% 145% 9% 8% 11%
AKRA Transport / Chemicals 29% 17% 22% 28% 25% 27% 29% 44% 48% 38% 37% 22% 12% 17%
MPPA Retail 14% 11% 7% -5% -3% -3% 0% 15% 20% 21% 20% 12% 4% na
HEXA Heavy Equipment 19% -55% -56% -57% 5% 12% 25% -1% -54% 85% 61% 100% 85% 8%
BLTA Shipping 19% 20% 33% 127% 136% 138% 101% 13% -4% 13% 15% 13% 7% 11%
Source: Bloomberg, Danamon calculations
Forward looking (though less reliable) FDI data also
shows similar trends
FDI “realization” (US$mn): Tertiary sector
8000 2005 2006 2007 2008 2009 2010
• Consistent increase in quarterly Foreign
7000
Direct investment (FDI) in raw commodity
6000
(primary) sectors
5000
4000
• …as well as services (tertiary) sectors
3000
since 2009.
2000
1000
• There is signs of FDI improvement in
0
secondary sector (manufacturing) but less
1Q 2Q 3Q 4Q
apparent. Source: BKPM; Data doesn’t include Banking, Non Bank Financial
Institution, Insurance, Leasing
FDI “realization” (US$mn): Primary sector FDI “realization” (US$mn): Secondary sector
900 2005 2006 2007 2008 2009 2010 2500 2005 2006 2007 2008 2009 2010
800
700 2000
600
1500
500
400
1000
300
200 500
100
0 0
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
Source: BKPM; Data doesn’t include oil and gas mining Source: BKPM
Investment in a number of domestic demand sectors may
require more capital goods imports going forward
DDI “realization”: Transport and communication
• There have been FDI and Domestic Direct 2500 Rpbn 2005 2006 2007 2008 2009 2010
Investment (DDI) improvements in utilities
2000
infrastructure.
1500
• 1Q10 DDI improvement also in transport
and comm. sector. 1000
• These sectors are domestically oriented, 500

but investment may need capital goods
0
imports going forward.
1Q 2Q 3Q 4Q
Source: BKPM
DDI “realization”: Electricity, gas and water FDI “realization”: Electricity, gas and water
3500 Rpbn 2005 2006 2007 2008 2009 2010 800 2005 2006 2007 2008 2009 2010
US$mn
3000 700
2500 600
500
2000
400
1500
300
1000 200
500 100
0 0
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
Source: BKPM Source: BKPM
Inflation and interest rate developments
• Inflation has risen but mainly limited to food and

administered prices.
• BI’s latest reserve requirement package buys time to

avoid raising the benchmark rate at least until 2Q11.
• We should watch inflation expectations, the core inflation

rate and deterioration of current account balance.
Inflation creeping up, but has not become broad-based
Wholesale price inflation: No strong uptrend

50 % y-o-y
• Inflation climbed in Aug-10 (6.44% vs. Mining & Quarrying
6.22% in July). 40
• But rise not yet very broad-based; increase 30

in core inflation (4.24%) less profound. 20
Agriculture
• Consumer inflation expectations pulled- 10
back in August. Construction Materials
0
• Wholesale price level inflation also shows
-10
no strong uptrend. Source: BPS, CEIC, Danamon Calculations
Imports
-20
Aug-06 Aug-07 Aug-08 Aug-09 Aug-10
CPI inflation and BI rate Consumer inflation expectations index

20 190 pt
% y-o-y, p.a.
18
Price expectation
16 180 6Mforward (LHS)
14
12
170
10
160
8
BI rate
6
Core inflation 150
4 Headline inflation
2 140
Aug-05 Aug-06 Aug-07 Aug-08 A ug-09 Aug-10 Aug-06 Aug-07 Aug-08 Aug-09 Aug-10
Source: BPS, CEIC Source: Bank Indonesia, CEIC
Loans growth continues to accelerate
• IDR loan growth accelerated in July (22% y-o-y, 0.8% m-o-m).
• FCY (USD) loan growth catching up fast (18% y-o-y, 1.8% m-o-m) in July
on an exchange rate adjusted basis.
IDR loan growth (% m-o-m) USD loan growth (% m-o-m, exchange rate adjusted)
6 8 % m-o-m
% m-o-m
5 6
4
4
3
2 2
1 0
0 Jan Feb Mar Apr May Jun Jul
-1 -2
Jan Feb Mar Apr May Jun Jul
-2 -4
2006 2007 2008 2009 2010
-3 2006 2007 2008 2009 2010
-6
-4
Source: Bank Indonesia, CEIC Source: Bank Indonesia, CEIC
IDR TPF growth increased to 15% y-o-y in July
• IDR TPF (Third Party Funds) grew 0.6% m-o-m, 15% y-o-y in July.
• Domestic liquidity pool continues downward trend…
• …shrinking (-Rp30tn) in July upon withdrawal of 13th month civil servant

salary.
IDR TPF growth IDR “excess deposits”

5 % m-o-m
400000 Rpbn Rpbn 500000
Bank excess deposits (IDR)
4
350000 450000
3
2
300000 400000
1
0 250000 350000
-1 Jan Feb Mar Apr May Jun Jul
-2 200000 Bank holdings of SBI + Bonds 300000
-3 2007 2008 2009 2010

150000 250000
-4 Aug-07 Aug-08 Aug-09 Aug-10
Excess Deposits = Bank Deposits - Loans - Reserv es at BI
Source: Bank Indonesia, CEIC Source: Bank Indonesia, CEIC, Danamon calculations
BI reserve requirement hike in November may absorb
Rp50 – 55tn in liquidity
• Based on July figures, the 3ppt PRR hike would draw out Rp52tn from the
system.
• Our estimates: LDR-linked RR in Mar-11 may absorb another Rp10tn.
Deposits, LDR and CAR of selected commercial banks per 2Q10

Deposits LDR
(Blended) (Blended) CAR
Danamon 67,015 106.0 15.3
BRI 259,342 87.2 14.1**
BNI 184,198 68.9 13.5**
Mandiri 326,578 67.6 14.5**
Niaga 106,180 86.3 12.1**
BII 52,214 94.3 14.9
NISP 30,892 77.5 18.7
Permata 47,232 90.2* 12.2*
BTN 39,997 116.1 18.7
MEGA 32,791 63.6 17.7
BCA 255,030 52.7 14.7**
Panin 62,407 80.2 19.7
BTPN 22,351 88.3 18.5*
Bukopin 38,108 77.5 13.3
Total / Average 1,524,335 82.0 15.7
Source: Bloomberg, Danamon estimates; Blended: includes IDR + USD portions; *4Q09 figures; **Company figures
BI rate hike forecast pushed back into 2011
• BI’s quantity tightening measures buy time to avoid rate hike in 2010.
• Rate hike could be delayed further into 1Q-2011, when core inflation may
exceed 5.5%...
• …and the current account surplus narrows further (if not turn into deficit).
• Further delay in energy subsidy reforms may be favorable for short-term
inflation, but could exacerbate the trade balance deterioration.
Indonesia current account (% of GDP) Indonesia M1 growth and core inflation
% of GDP 30 % y-o-y % 11
4.5
M1 growth (lead 18M)
4.0
10
3.5 25
3.0 9
2.5
20
8
2.0
15 7
1.5
1.0 6
10
0.5
5
0.0 5 Core Inflation, RHS 4
-0.5
-1.0 0 3
2003 2005 2007 2009 2011 2013 2015 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12
Source: BPS, CEIC; Shaded: Danamon estimates Source: CEIC, Danamon estimates
Exchange rate and yield curve outlook
• If the current account worsens, exchange rate

fluctuations will become more dependent on capital
flows.
• We think the exchange rate is likely to head towards

Rp9,150/US$ by end-2011.
• In the IDR bond market, reduced supply from MOF and

strong offshore real money flows may keep long-end
yields suppressed in the near term.
As trade surplus narrows, capital flows will be more
closely monitored
• With the foreign trade surplus shrinking and current account surplus
narrowing…
• …IDR/USD movements will be more dependent on capital flows going

forward.
• BI will also likely to be even more participative in the market, smoothing

out fluctuations.
Foreign ownership of bonds and SBI Net foreign flows in the equity market
200 Rptn 8000 JCI: Net foreign buying (Rpbn)
180 Foreign Ownership:
IDR Government Bonds 6000
160
140
4000
120
100 2000
80
0
60
Foreign Ownership:
40 SBI
-2000
20
0 -4000
Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Aug-06 Aug-07 Aug-08 Aug-09 Aug-10
Source: Bank Indonesia Source: CEIC
2011 exchange rate forecast
• We still expect strong capital account surplus in 2011, however smaller

current account surplus could reduce the balance of payments surplus.
• Domestic money supply M2 will also accelerate, given stronger economic
growth and higher inflation.
• Given our money supply and BOP projections, we think the exchange rate
is likely to head towards Rp9,150/US$ by end-2011.
International reserves and import cover M2/Reserves and IDR/USD

6.5 US$mn 100000 12500 IDR/USD IDR/USD 40000
Nominal Exchange
Months of imports 12000 38000
90000 Rate (LHS)
6.0 and STED, LHS 11500
36000
80000 11000
34000
5.5
10500
70000 32000
10000
5.0 30000
60000 9500
28000
9000
4.5
50000
8500 M2 / Foreign Reserves 26000
(Adj. RHS)
4.0 40000 8000 24000
2007 2008 2009 2010 2011 Aug-02 Aug-04 Aug-06 Aug-08 Aug-10
Source: CEIC, 2010 and 2011 are Danamon estimates Source: CEIC, Danamon estimates
Highlights from the proposed 2011 fiscal budget
2010 Rev. budget 2011 Planned chg

• Deficit of 1.7% GDP (vs. expected
A) Total revenue and grants 992.4 1086.4 94
realization of 1.5% this year).
1) Tax revenues 743.3 839.5 96.2
2) Non-tax revenues 249.1 243.1 -6.0
B) Government Expenditures 1126.1 1202 75.9 • Stable, on the low side, tax ratio.
1) Ministry and agencies 366.2 410.4 44.2
2) Non-Ministries 415.3 413.2 -2.1 • Higher infrastructure spending and
Energy subsidies 144.0 133.8 -10.2 lower energy subsidies.
II) Transfer to region 344.6 378.4 33.8
D) Surplus / Deficit -133.7 -115.7 18.0
• Another 15% increase in electricity
as % of GDP 2.1 1.7 -0.4
tariffs (got rejected by parliament
E) Financing 133.7 115.7 -18.0
recently).
- Government bonds (net) 107.5 125.5 18.0
Assumptions 2010 Rev. budget 2011 Planned • Caution: Numbers can still change
GDP growth (%) 5.8 6.3
3M SBI rate (%.p.a.) 6.5 6.5
Indonesian crude price ($/bl) 80 80
Exchange rate (Rp/US$) 9,200 9,300
Oil lifting (kbpd) 965 970
Source: MOF
But next year’s supply schedule looks more challenging
• Increased reliance on bond market financing;
• Reduction of net foreign loan withdrawal.
• Comment: Rising debt issuance still looks manageable, but success will
depend much on foreign investor appetite.
2011 fiscal highlights

APBN-P RAPBN APBN-P RAPBN
FINANCING NEED (IDR Trillion) FINANCING SOURCE (IDR Trillion)
2010 2011 2010 2011
1. Fiscal Deficit 133.7 115.7 1. Domestic Borrowing 1.0 1.0
2. Maturing Bonds, incl. buyback 70.6 84.0 2. Gross Bond Issuance 178.0 209.5
3. Maturing External Debts 54.1 48.1 2. External Debts: 70.8 57.1
4. Gov.Invest. & Capital Inject. 22.5 16.3 a. Program Loans 29.4 17.7
5. Channel to SOEs/Reg.Gov. 16.8 12.0 b. Project Loans 41.4 39.4
4. Domestic Banks, incl. SILPA 45.5 7.7
5. Privatize & Asset Sales 2.4 0.8
Total Financing Need 297.7 276.1 Total Financing Source 297.7 276.1
Source: MOF
The dominant vs. the dormant
• Up to Aug-2010, offshore investors (Rp70.8tn) have been net buyers of IDR

govvies.
• Onshore investors have been net sellers (-Rp7tn).
Ownership of IDR Tradable Government Bonds (%)

Net Buyers of IDR Government Bonds (% of Total)
100% 150 150
13.1 16.4 16.7 18.6
26.1 27.7 125 Banks 125
Bank Indonesia
80% 13.88 100 Mutual Funds 100
14.44 Insurance & Pension
5.12 16.89 Foreign
18.92 75 75
60% 5.51 Securities & Others
6.30 18.34 18.35 50 50
7.77
7.86 8.03 25 25
40%
64.3 0 0
56.2
49.2
20% 43.7 -25 -25
37.5 35.6
-50 -50
0% -75 -75
2006 2007 2008 2009 Jun-10 Aug-10 2007 2008 2009 1H10
Banks Bank Indonesia Mutual Funds

Source: MoF, Danamon estimate
Insurance & Pension Securities & Others Foreign
Will onshore investors still stay on the sidelines next
year?
• Banks
– Funding costs rising; need cash to fund loans growth
– Negative carry on bonds for most banks (vs. marginal cost of funds)
– SBIs give better yield with more liquidity
– Next year, banks likely to be net sellers of bonds (-Rp15 — 20tn)
• Pension funds & Insurance

– Traditional pension funds
• Running defined benefit schemes
• ALM not a top priority
• Government bonds don’t seem too attractive:
– Some banks offer better interest rates at shorter tenors
– Wait for corporate bond primary issuances
– Higher allocation into equities
– Insurance & modern pension funds
• Stable demand for bonds
• Implication: At current yields, the government will still very much have to
rely on foreign inflows to accommodate their 2011 issuance schedule.
Bond yields: cross-country comparison
• ID inflation-adjusted 10-yr yield now more aligned with regional peers, but
still among the highest in the Asia Pacific.
10-yr local currency yield (%) comparison

10-yr Yield Consensus Inflation "Real Yield" S&P Rating
LCY 2010 2011
Australia 5.09 3.0 3.0 2.1 AAA
China 3.32 3.3 3.1 0.2 A+
Hong Kong 2.09 2.8 2.9 -0.8 AA+
India 7.95 7.8 5.4 2.6 BBB-
Indonesia 7.75 4.7 5.8 2.0 BB
Japan 1.01 -0.9 -0.2 1.2 AA
Philippines 6.02 4.5 4.2 1.8 BB-
Singapore 2.06 2.7 2.6 -0.5 AAA
Korea 4.3 2.9 3.1 1.2 A
Taiwan 1.23 1.3 1.6 -0.4 AA-
Thailand 3.12 3.3 3.0 0.1 BBB+
Source: Bloomberg (27-Sep), FocusEconomics (Aug-10); Real Yield: Nominal yield – 2011consensus inflation
Reduced supply may allow for tactical flattening
• Until YE10, new issuances will be limited to around Rp17tn or Rp3.4tn per
auction.
• Reduced supply from MOF and strong offshore real money flows may
keep long-end yields further suppressed.
• Externally, prospects of QE2 in the US also bringing down yields globally.
• In the last auction, bid to cover ratio was very high (9.3 times) for the 21-
yr bond.
IDR sovereign yield curve

1M ago
29-Sep
Source: Bloomberg
Indonesia Selected Economic Indicators
2007 2008 2009 2010E 2011E
National Accounts
Real GDP (% y-o-y) 6.3 6.1 4.6 6.1 6.4
Domestic demand ex. inventory (% y-o-y) 6.0 7.4 5.5 6.2 7.6
Real Consumption: Private (% y-o-y) 5.0 5.3 4.9 4.8 4.9
Real Gross Fixed Capital Formation (% y-o-y) 9.2 11.7 3.4 10.0 11.7
GDP (US$bn) — nominal 433 507 536 672 774
GDP per capita (US$) — nominal 1,925 2,227 2,324 2,878 3,274
Open Unemployment Rate (%) 9.8 8.6 7.9 7.2 6.9
External Sector
Exports, fob (% y-o-y, US$ bn) 14.0 18.3 -14.4 24.7 11.1
Imports, fob (% y-o-y, US$ bn) 15.4 36.8 -27.7 33.4 15.5
Trade balance (US$ bn) 32.8 22.9 35.2 36.6 35.7
Current account (% of GDP) 2.5 0.1 2.0 1.1 0.4
Central government debt (% of GDP) 35.1 33.0 28.8 26.0 24.4
International Reserves –IRFCL (US$ bn) 56.9 51.6 66.1 83.3 95.2
Reserve cover (Imports and external debt) 5.7 4.0 6.5 5.8 6.0
Currency/US$ (Year-end) 9,419 10,950 9,403 9,075 9,150
Currency/US$ (Average) 9,163 9,767 10,356 9,100 9,115
Other
BI policy rate (% year end) 8.00 9.25 6.50 6.50 7.50
Consumer prices (% year end) 6.60 11.06 2.78 6.10 6.50
Fiscal balance (% of GDP; FY) -1.3 -1.0 -1.6 -1.4 -1.2
S&P's Rating - FCY BB- BB- BB- BB BB+
Source: CEIC, Danamon estimates
"Note: The above views, trends and pricing are subject to change without notice and are based on certain assumptions. Actual
results may differ materially. Prior to making any investment decision, you should make your own determination that the
investment is consistent with your objectives and that you are able to assume the risk."
DISCLAIMER
The information contained in this report has been taken from sources which we deem reliable. However, none of P.T. Bank Danamon Indonesia Tbk. and/or its affiliated
companies and/or their respective employees and/or agents makes any representation or warranty (express or implied) or accepts any responsibility or liability as to, or in
relation to, the accuracy or completeness of the information and opinions contained in this report or as to any information contained in this report or any other such information
or opinions remaining unchanged after the issue thereof. We expressly disclaim any responsibility or liability (express or implied) of P.T. Bank Danamon Indonesia Tbk., its
affiliated companies and their respective employees and agents whatsoever and howsoever arising (including, without limitation for any claims, proceedings, action , suits,
losses, expenses, damages or costs) which may be brought against or suffered by any person as a result of acting in reliance upon the whole or any part of the contents of this
report and neither P.T. Bank Danamon Indonesia Tbk., its affiliated companies or their respective employees or agents accepts liability for any errors, omissions or mis-
statements, negligent or otherwise, in the report and any liability in respect of the report or any inaccuracy therein or omission there from which might otherwise arise is hereby
expressly disclaimed. The information contained in this report is not be taken as any recommendation made by P.T. Bank Danamon Indonesia Tbk. or any other person to enter
into any agreement with regard to any investment mentioned in this document. This report is prepared for general circulation. It does not have regards to the specific person
who may receive this report. In considering any investments you should make your own independent assessment and seek your own professional financial and legal advice.

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Certification and Other Disclosures

Indonesia 2010 and 2011 Economic Outlook

Anton Gunawan Helmi Arman Anton Hendranata

• …this may continue as long as consumer confidence is

• Unfortunately growth in the manufacturing sector has been

Non-food consumption growth rising Higher discretionary spending

Investment growth accelerating Construction, imported machinery,

But government consumption shrinking large fiscal surplus in 2Q10

Broad-based demand Household consumption: Food vs. non-food

Source: BPS, CEIC Source: BPS, CEIC

Passenger car sales Motorcycle sales: Astra

• By industry, growth focused on services-related sectors e.g. wholesale

• Manufacturing sector growth: modest and narrow based

-2 Data uses 2000p base year fromMar-04 1

Source: BPS, CEIC Source: BPS, CEIC

• Stable agriculture sector

• Mining growth dragged

• Non traded sector

• Import growth will remain strong amid continued rise in

• Pace of trade balance deterioration should be closely watched

• Long term trend: Increased importance of (especially) non-oil primary

35 Primary comm. exports 50

• Conventional competitiveness indicator shows mixed evidence.

115 2006 = 100 100 2006 = 100

110 95 6-Country REER,

Source: BPS, CEIC Source: BPS, CEIC

Source: BPS. Commodity exports are in bold

• Electrical appliances: Export value still rising…

• …but volume has been stagnant

• Clothing exports: No strong uptrend; growth close to stagnant.

• Footwear exports: Some improvement, recently.

Source: BPS, CEIC Source: BPS, CEIC

Indonesia foreign trade Indonesia oil trade balance

12000 3000 -500

8000 1000 -1500

Oil trade balance (deficit)

4000 -1000 -2500

Source: BPS, CEIC Source: BPS, CEIC

Indonesia imports: by category

• …but surge in last two months driven 6000

Source: BPS, CEIC

Indonesia import growth: by category

• Aircraft imports Leasing mechanism Not lump-sum payment using US$

Indonesia top 10 imports (non-oil and gas)

• In the sample, relatively strong increase in fixed assets seen in vehicle,

Increase in gross fixed assets of selected listed manufacturing companies (% y-o-y)

• On average, pace of capacity expansion appears to have been broader

• These sectors are domestically oriented, 500

• Inflation has risen but mainly limited to food and

• BI’s latest reserve requirement package buys time to

• We should watch inflation expectations, the core inflation

Wholesale price inflation: No strong uptrend

• But rise not yet very broad-based; increase 30

CPI inflation and BI rate Consumer inflation expectations index

• IDR loan growth accelerated in July (22% y-o-y, 0.8% m-o-m).

• Domestic liquidity pool continues downward trend…

• …shrinking (-Rp30tn) in July upon withdrawal of 13th month civil servant

IDR TPF growth IDR “excess deposits”

-3 2007 2008 2009 2010

• Our estimates: LDR-linked RR in Mar-11 may absorb another Rp10tn.

Deposits, LDR and CAR of selected commercial banks per 2Q10

Indonesia current account (% of GDP) Indonesia M1 growth and core inflation