Economic and Social Update April 2008 William E. Wallace, Lead Economist World Bank, Indonesia April 1, 2008

Indonesia had sustained GDP growth in 2007

Largely on domestic drivers

With capital goods and construction up & consumption rebounding on falling interest rates Investment (percentage change) Consumption (percentage change)

Which, in turn, supported a turn around in employment growth Which, in turn, supported a turn around in employment growth (and reduced unemployment)

Trends continued and services & Utilities continued strong while tradables were mixed

Domestic economy is drawing in imports; while higher commodity prices supported exports

But Indonesian exports are becoming less dependent on the US (and more on China and India)

And commodities drove Indonesia’s stock market to one of the best performances in the world Equity Price Indices 1/2/2006=100

But challenges are mounting as oil prices put pressure on fiscal policy

And energy subsides risk crowding out other spending (and distorting incentives)

And Indonesia’s Fuel Prices are Very Low (even adjusted for income)

While other commodity prices feed into domestic food costs (with rice an exception) CPI inflation Year-on-year percentage change Wholesale & international rice prices

And borrowing spreads are rising, but remain low in historical perspective Source: Bloomberg

And International conditions continue to deteriorate Industrial production growth, year on year (%) OECD leading indicator OECD IP Source: World Bank, DECPG.

The global outlook for 2008 Prelim.Projected Real GDP growth (annual % change): World OECD United States Japan Euro Area Developing East Asia Pacific World trade (% change in volume) CPI inflation G7 (% change) Oil Price (USD per barrel) * Non-oil commodity prices (% change) * Simple average of spot prices of U.K. Brent, Dubai, and West Texas Intermediate crude oil. Source: World Bank Development Economics Prospects Group (preliminary, March 2008)

But developing and high-income country growth has been diverging Developing countries High-income countries Source: World Bank, DECPG.

With developing countries providing more momentum especially to trade growth United States Developing countries Source: World Bank, DECPG. Contribution to global nominal import growth in US$, year on year (%-points)

But Indonesian growth to slow moderately The outlook for the Indonesia economy GDP growth NIA real export growth Fixed investment growth BOP Current account (% of GDP) BOP Capital account (% of GDP) Foreign reserves (Bill.$) Central government bal. (% of GDP) Government debt (% of GDP) CPI Inflation (%) Key policy interest rate (1 m SBI)

Overview Indonesia 2007 was a good year – Solid output growth – Accelerating investment and – Better employment outcomes. And there are strengths going forward – Domestic momentum from credit expansion and growing infrastructure investment. – Relatively smaller trade shares (i.e. more focus on the domestic economy) with trade concentrated in commodities where prices are expected to continue relatively strong – Reduced government debt exposure (<35% of GDP) – Little exposure in the Banking system to the sub-prime debt But weaknesses as well – Higher food prices feeding through into higher inflation and social insecurity – A high subsidy burden on the budget from controlled domestic fuel prices – High government borrowing needs

Thank You!

While growth and investment have fed into higher imports and commodity prices supported exports