1. 1 Indonesia: Macroeconomic Update and Progress on Structural Reforms October 25, 2007 1

2. Outline Recent Economic Development Progress on Structural Reform Efforts to Accelerate Infrastructure Development 2

3. 3 Indonesia’s economic recovery continues and persistent 3 Persistent Improvement over Time: GDP Growth 1998-2007 Percentp.aPercentp.a -13.8% GDP has grown by 6% over last 4 quarters, While non oil GDP has reached 7% in Q2-07

4. 4 Supported by recoveries in private consumption and strong external demand 4

5. 5 Private Investment show a significant improvement 5

6. Poverty and Open Unemployment is declining 6

7. 7 Macroeconomic Risks continue to decline

8. 8 Structural Reform Inpres 6/2007 consists of policy actions for ▫ Improving investment climate ▫ Accelerating infrastructure providing in Indonesia through improving policy environment which include de-monopolize SOEs, providing legal basis and incentive for PPP. ▫ Encouraging SME development and ▫ Reforming financial sector and SOEs Partial and Gradual Administration Reform. Revitalization Agriculture Sector Energy Sector Reform Poverty Reduction National Program (Including rural infrastructure program) ▫ PNPM : coverage and size of allocation per sub district expanded significantly.  All sub district will be covered and allocation per district is risen up Rp 3 billion ▫ Conditional Cash Transfer : Pilot Project in 6 Provinces in 2007 and 2008 8

9. 9 Structural Reform: Inpres No 6/2007; Some Highlights ▫ Investment Climate :  Implementation Regulations of Investment Law  PP No : to provide clarity of authority and responsibility between central and local government and better mechanism for evaluation local regulations  Efforts to reduce days of setting up business near complete  PEPI is operational  Major improvement in VAT refund mechanism  Modernization in Custom and Tax Administration ▫ Infrastructure Reform ▫ Financial Sector Reform  Financial Sector Stability Forum is operational  BEJ and BES merger  Draft of Fiscal Incentives for Public Companies is completed ▫ SME Sector Reform  Framework for SME Credit Guarantee System is completed  Business Plan for two SOEs : Askrindo and PT SPU completed and capital injected for those SOEs are approved by the Parliament ▫ Bureaucratic and Institutional Reform (Ministry of Finance and some regional governments) 9

10. 10 Progress on Investment Climate 10 Monitoring surveys show a real improvement in investment climates and partly reflected in current investment recovery.

11. 11 Efforts to accelerate infrastructure development Multiple tracks strategy ▫ Increase budget allocation for infrastructure including matching grant for region to encourage higher allocation for infrastructure from local government budget ▫ PPP through partial guarantee: toll road ▫ Crash program for electricity sector ▫ Institutional Reform to allow private sector participation. Partly implemented this year but majority in 2008 11

12. 12 Model Projects: 0f 10 model projects, 4 projects are under way ▫ Tangerang Water Project: tender was completed and now on the bidder evaluation stage. ▫ Toll Solo Kertosono: Tender was completed but no interest; new scheme is prepared. ▫ Central Java Power Plant: tender preparation with IFC assistance. ▫ Telecom : Palapa Ring : the bid winner awarded through private consortium scheme.