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OFFICE OF CHIEF ECONOMIST

May 2010
Contents Fear Factor 2010: European Sovereign Risk Fertilizer Industry in Indonesia: Raw Materials continue to be the Main Obstacle Impact of Electricity Tariff Increase: A DyRec-CGE Analysis Mandiri Current Forecast Indonesia Current Data (Table) p. 02 p. 18
Indonesia Update
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.
p. 28 p. 42 p. 43
Chief Economist Mirza Adityaswara Mirza.Adityaswara@bankmandiri.co.id Analyst Moch. Doddy Ariefianto Faisal Rino Bernando Nina Anggraeni Rini Setyowati M. Ajie Maulendra Nadia Kusuma Dewi Nurul Yuniataqwa Karunia Sindi Paramita Reny Eka Putri Publication Address: 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 Email: Moch.Ariefianto@bankmandiri.co.id Rino.Bernando@bankmandiri.co.id Nina.Anggraeni@bankmandiri.co.id Rini.Setyowati@bankmandiri.co.id Ajie.Maulendra@bankmandiri.co.id Nadia.Dewi@bankmandiri.co.id Nurul.Karunia@bankmandiri.co.id Sindi.Paramita@bankmandiri.co.id Reny.Putri@bankmandiri.co.id See important disclaimer at the end of this material
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 Indonesias 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.
160000 140000 120000 100000 80000 60000 40000 19000 20000 0 2005 2006 2007 2008 2009 -1000 39000 99000 127637 119969 105987 111402 133120 79000
National Electricity Consumption (GWh)
59000
Total (RHS) Industrial (LHS)
Social Institutional (LHS) Business (LHS)
Household (LHS) Public (LHS)
Fear Factor 2010: European Sovereign Risk

Moch. Doddy Ariefianto (moch.ariefianto@bankmandir.co.id)
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.
Economic recovery is progressing stronger than expected
Office of Chief Economist
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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).
Area World Euro Area UK US Japan China India ASEAN-5
2007 5.1 2.7 2.6 2.0 2.3 13.0 9.4 6.3
2009 -0.8 -3.9 -4.8 -2.5 -5.3 8.7 5.6 1.3
April 2010 Forecast 2010 2011 4.2 4.3 1.0 1.5 1.3 2.5 3.1 2.6 1.9 2.0 10.0 9.9 8.0 8.4 8.0 5.6
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).
The wide disparity of growth has been mainly due to the disproportionate nature of crisis impact
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.
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Asia
41
Europe
566
USD billion
US
1.174
World
1.781
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).
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).
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).
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
Office of Chief Economist Page 4 of 44
likely to hold near record low until considerable time ahead (see figure 4).
3.5
US Fed
3 2.5 2 1.5 1 0.5 0 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11
14 12 10 8
RBA India
China BI Rate
Brazil
ECB BOE BOJ
6 4 2 0 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11
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)
wide divergence of economic performance also implies different policy stance
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.
Advanced Economies (Lhs) Emerging Economies (Rhs) %
9 8.5
7.5 7
8 7.5 7 6.5 6 5.5 5 4.5 4.5 4

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
6.5 6 5.5 5
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). Office of Chief Economist Page 5 of 44
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.
These countries (the GIPSI) share the common characteristics of debt vicious circle
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.
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Time October 2009 November 2009 December 2009 January 2010 February 2010
Event 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. 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. 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). Greece unveiled the Stability and Growth Program which aims to cut deficit from 12.7% in 2009 to 2.8% in 2012 (austerity measures). Greece implemented a couple of austerity measures which was responded to by a oneday 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. 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. 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. 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.
March 2010
April 2010
May 2010
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).
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 countrys credit rating three notches from BBB+ to BB+ (just above one notch to Indonesia, BB). Greeces rating is currently non-investment grade (junk bond).
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Greece Portugal Ireland Italy Spain UK US
Budget deficit Debt-to-GDP External debt Short-term Current 2010 (% GDP) 2010 (% debt) debt (% GDP) account 2010 (% GDP) -12.2 124.9 77.5 20.8 -10.0 -8.0 84.6 73.8 22.6 -9.9 -14.7 82.6 57.2 47.3 -1.7 -5.3 116.7 49.0 5.7 -2.5 -10.1 66.3 37.0 5.8 -6.0 -12.9 80.3 22.1 3.3 -2.0 -12.5 93.6 26.4 8.3 -2.6
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).
As a consequence of deteriorating confidence, the countries concerned are now also facing higher cost of financing
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.
2000 1800 1600 1400 1200 1000 800 600 400 200 0
1000 900 800 700 600 500 400 300 200 100 0
5/11/09
Greece Portugal Ireland Italy Spain
Greece Portugal Ireland Spain Italy
7/11/09
9/11/09
11/11/09
1/11/10
3/11/10
5/11/09
7/11/09
9/11/09
11/11/09
1/11/10
3/11/10
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).
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.
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.
1400 1200 1000 800 600 400 200
0
1287.5
724
347 120 Greece 58.5 Portuga l 38 Irel a nd Spa i n Ita l y Tota l
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).
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
larger attack should the government continue with its fiscal stabilization plan.
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).
share of wages and social benefits account for a substantial portion in the budget.
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.
Debt To GDP ratio 2007 71 112 28 104 42 2010 91 127 81 123 68 Annual Primary Balance To Reach 2007 Level Debt To GDP Ratio 5 Years 10 years 20 Years 5.7 3.1 1.8 5.1 3.4 2.5 11.8 5.4 2.2 5.4 2.8 1.5 6.1 2.9 1.3
Countries
Portugal Italy Ireland Greece Spain
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). Office of Chief Economist Page 10 of 44
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.
There are three channels from which crisis from a certain region could spread to another
Trade Channel
Global Financial Shock
Financing Constraint
Economic Activity
Psychology
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 :-)
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.
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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.
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).
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
portfolio investment in 2010, sharply increased from USD 191.1 billion in the previous year. This number would likely grow to become even greater.
Capital inflows to Emerging Economies by Region, Net USD billion 2007 Private Flows 1252.2 Latin America 228.9 Emerging Europe 445.7 Africa/Middle East 155.4 Emerging Asia 422.2 Official Flows Latin America Emerging Europe Africa/Middle East Emerging Asia 42.9 6.3 4.2 3.7 28.6
2008 649.1 132.4 270.1 75.3 171.2 55.5 14.5 20.9 1.5 18.5
2009f 348.6 99.8 20.4 37.4 191.1 63.6 22.2 39.4 1.9 0
2010f 671.8 150.9 179.3 68.7 272.9 43.4 14.7 16.8 5.6 6.3
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).
the road is still a long way to go.
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.
Asset Bubble Sovereign Risk
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) Office of Chief Economist Page 13 of 44
the fiscal crisis in Europe has yet to take its toll.
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 Indonesias Standing, following Moodys & Fitch; S&P upgraded Indonesias Long Term Foreign Currency rating by one notch from BB- to BB.
140 120 100 80 60 47 45 40 20 0

2010 2014 2017 2020 2023 2026 2029 62 50 45 48 38 39 17 25 21 18 20 4 14 18 10 56 60
127
15
20
27
2032
2035
2038
Figure 16. Government Debt Profile. Indonesias 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).
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.
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250 Foreign Ownership (IDR tn) 200 SUN SBI % foreign in SBI % foreign in SUN
40% 35% 30% 25% 20%
150
100
15% 10% 5%
50
Jan-08 Jun-08 Nov-08 Apr-09 Sep-09 Feb-10
0%
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).
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.
(in USD mn ) 2007 10,492 32,754 118,014 - 85,260 - 11,841 - 15,525 5,104 2008* 126 22,916 139,606 -116,690 -12,998 -15,155 5,364 1Q09* 2,509 6,886 24,179 - 17,293 -2,743 -2.742 1.109 2Q09* 2,481 8,367 28,130 - 19,763 - 3,310 - 3,776 1,200 3Q09* 2,150 8,491 31,273 - 22,781 - 3,517 - 4,072 1,247 4Q09* 3,442 11,454 35,932 -24,478 -4,585 -4,742 1,315 2009* 10,582 35,197 119,513 - 84,316 - 14,155 - 15,331 4,871 2010f 1,790 16,154 106,051 - 89,897 - 8,000 - 10,764 4,400
Current Account (CA) Goods Exports Fob Imports Fob Serv ices Income Current Transf er
Capital and Financial Account Direct Inv estment Portf olio Inv estment Other Inv estment
3,592 2,253 5,567 -4,775
-1,876 3,419 1,721 -7,309
1,502 453 1,859 - 829
- 1,757 400 1,959 - 4,144
2,523 472 2,988 -970
1,405 988 3,298 -2,896
3,673 2,313 10,103 - 8,838
400 3,000 5,000 - 2,000
Ov erall Balance
12,715
-1,945
3,955
1,052
3,546
3,954
12,506
8,190
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).
The quality of external balance decreased significantly in 2010.
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
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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.
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Fertilizer Industry in Indonesia: Raw Materials Continue to be the Main Obstacle

Nadia Kusuma Dewi (nadia.dewi@bankmandiri.co.id)
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%.
Domestic consumption of fertilizer has grown by 5% per year in the last five years
dominated by urea fertilizer (69.2%)
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Domestic Consumption of Fertilizer (Mn Ton) 8.24 8.66
Agriculture Sector Fertilizer Consumption by Type (%)
25.7 29.9 23.6 23.5
34.0
7.62
7.88
NPK 14.3% ZA 9.4% TSP/SP36 7.1% Urea 69.2%
2001
2003
2005
2007
2009F
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)
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.
Company PT Pupuk Sriwijaya Pusri II Pusri III Pusri IV Pusri IB PT Petrokimia Gresik ZA I ZA II/III SP-36 I/II Urea Phonska I Phonska II & III NPK I NPK II NPK III & IV NPK Blending PT Pupuk Kujang Kujang IA Kujang IB NPK Blending PT Pupuk Kalimantan Timur Kaltim I Kaltim 2/3 Popka Kaltim IV NPK Pelangi PT Pupuk Iskandar Muda (PIM) PIM I PIM 2
Product
Capacity (Ton/Year)
Urea Urea Urea Urea Amonium Sulphate Amonium Sulphate Phosphate Urea NPK NPK NPK NPK NPK NPK Urea Urea NPK Urea Urea Urea (Granule) Urea (Granule) NPK Urea Urea
552,000 570,000 570,000 570,000 200,000 250,000/200,000 (2X) 500,000 460,000 460,000 1,280,000 100,000 100,000 200,000 60,000 570,000 570,000 300,000 700,000 (2x) 570,000 570,000 570,000 450,000 570,000 570,000
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)
The market structure of the fertilizer industry is oligopolistic, whereby fertilizer production is controlled by five major StateOwned 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
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.
USD/Short 900 ton 800 700 600 500 400 300 200 100 0 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
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)
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.
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.
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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.
IDR/kg 1,800 *) Since December 1, 1998 1,600 **) January 1, 2003 - July 31, 2003 1,400 ***) August 1, 2003 - December 31, 2003 ****) Since May 17, 2006 1,200 1,000 800 600 400 200 0 2006**** 2003*** 2003** 1998* 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2004 2005 2007 2008
Urea
ZA
TSP
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) Office of Chief Economist Page 21 of 44
The stipulation of HET for subsidized fertilizers is aimed at securing the continued supply of low-cost fertilizers to farmers.
The stipulation of HET for subsidized fertilizers by the Government is aimed at securing the continued supply of lowcost 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.
World Natural Gas Price (USD/MMBtu) Pupuk Kaltim Production Cost (%) 2.2 1.9 3.4 2.9 5.7 84
15
12
Packaging
3 Depreciation Raw materials Wages & salary
Maintenance
0 5/18/2007
2/18/2008
11/18/2008
8/18/2009
5/18/2010
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)
Others
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Total
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.
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.
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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
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)
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 the farmers/farmer groups has been implementing closely based on Definitive Plan for Group Needs.
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
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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.
Product Established Operation
Continuity of raw material supply, outdated factories, and the issue of financing are still encountered by the national fertilizer industry .
Company PT Pupuk Sriwijaya Pusri II Pusri III Pusri IV Pusri IB PT Petrokimia Gresik ZA I ZA II/III SP36 I/II Urea Phonska (NPK) NPK Blending Phonska RFO I NPK Granulation I NPK Granulation II PT Pupuk Kujang Kujang IA Kujang IB PT Pupuk Kalimantan Timur Kaltim I Kaltim 2/3 Popka Kaltim IV PT Pupuk Iskandar Muda (PIM) PIM I PIM 2
Urea Urea Urea Urea Amonium Sulphate Amonium Sulphate Phosphate Urea NPK NPK NPK NPK NPK Urea Urea Urea Urea Urea (Granule) Urea (Granule) Urea Urea
1959
1974 1976 1977 1993
1972
1972 1984/1986 1979/1983 1995 1999 2004 2004 2006 2008
1975
1979 2005 1984 1985/1989 1999 2002
1982
1984 2005
Figure 24. Operational Age of Several Fertilizer Factories. The operational age of several StateOwned 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) Office of Chief Economist Page 25 of 44
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
The Government must adopt a policy supporting the national fertilizer industry.
1. Formulate both replacement and relocation plan for outdated 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
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2.
3.
4.
5.
6.
7.
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). 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. Bearing in mind that most of the types of fertilizers produced domestically are single fertilizers (urea, ZA, SP36), 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. The Government needs to provide incentives in order to increase investment in the fertilizer industry, by among other things providing customs duties incentives for nonurea fertilizer raw materials, considering that about 50%60% thereof must be imported. 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. 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 nonsubsidized fertilizers, resulting in the misuse in the allocation of subsidized fertilizers for foodcrops agriculture to other sectors. Improve supervision of the implementation of mandatory fertilizer SNI.
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Impact of Electricity Tariff Increase: A DyRec-CGE Analysis

Reny Eka Putri (reny.putri@bankmandiri.co.id)
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?
Government maintains the electric power tariff for fulfilling the electricity need
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
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Budget) of only IDR37.8 trillion, the total electricity subsidies required will amount to IDR16.7 trillion.
The electrification ratio is expected will increase to reach 72.6% in 2012
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 Indonesias 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.
Indonesia is still experiencing high growth for electricity demand
(mn people) 300 250 200 150 100 50 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 41 43 46 49 52 54 58 61 64 68 231 234 236 239 242 245 248 250 253 256
Population
PLN Consumer
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)
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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.
No. 1 Energy Demand Indonesia Java-Bali Outside Java-Bali 2 Energy Demand Growth Indonesia Java-Bali Outside Java-Bali 4 Electrification Ratio Indonesia Java-Bali Outside Java-Bali
Unit TWh
2008 128.9 100.9 28.0
2009 138.7 107.8 30.9 7.6 6.8 10.4 64.8 70.2 55.9
2010* 153.1 119.0 34.1 10.4 10.3 10.6 67.6 72.9 59.2
2012* 186.2 144.6 41.6 10.2 10.2 10.2 73.8 78.4 66.3
2014* 225.4 174.9 50.5 9.8 9.7 10.2 80.4 84.2 74.2
2018* 325.2 250.9 74.3 9.4 9.2 10.0 95.5 97.3 92.7
(%) 6.5 5.6 9.9 (%) 62.8 68.2 53.9
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)
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%.
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(GWh) 140000 120000 100000 80000 60000 40000 20000 0 2005 Total (RHS) Industrial (LHS) 2006 2007 105987 111402 119969
(GWh) 127637 133120 59000 49000 39000 29000 19000 9000 -1000 2008 2009 Household (LHS) Public (LHS)
Social Institutional (LHS) Business (LHS)
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).
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.
The rising demand of electricity is corresponding to the growth of economy
Compared to electricity consumption in the period of 20022008, 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
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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.
(GWh) 160000 140000 120000 100000 80000 60000 40000 20000 0 2002 2003 2004 2005 2006 2007 2008 2009
Production
Consumption
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
Indonesias 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.
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120% 100% 100% 80% 65% 60% 40% 20% 0% China Singapore Thailand Malaysia Indonesia Cambodia Laos 60% 60% 100% 90% 82%
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)
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).
Government proposes TDL increase by 10% in July 2010
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
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context of achieving the much discussed efficiency and reducing electricity subsidies is related to the governments 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-1990s 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.
Data & Methodology Analysis
Analysis seeks to explain the behavior of supply, demand and prices in a whole economy with many markets
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.
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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.
No. 1 2 3 4 5 6
Indicator Real GDP (Gross Domestic Product) Household Consumption Total Investment Terms of Trade Real Wage CPI (Consumer Price Index)
Impact (%) -0.12 0.21 -0.93 0.04 -0.20 0.27
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).
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
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.
TDL increase will provide producers an opportunity to increase goods & service price
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 Indonesias 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.
Impact (%) -3.33 -1.05 -0.77 -0.63 -0.53 -0.43 -0.42 -0.38 -0.30 -0.29 Electricity Share (%) 19.30 4.30 0.90 5.40 10.00 1.00 0.10 3.60 2.10 0.50
No. 1 2 3 4 5 6 7 8 9 10
Indicator Electricity Iron-Steel Electricity Machine Other Industries Textile-Clothes-Leather Gas-Water Oil Refinery Metal Industry Transport Vehicle Footwear
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).
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
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.
Electricity intensive sectors will suffer from the greatest impact
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 TextileGarment-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.
Page 37 of 44
No. 1 2 3 4 5 6 7 8 9 10
Indicator DKI Jakarta Banten East Kalimantan Bangka Belitung West Java Riau South Sumatra Nanggroe Aceh Darussalam Central Java East Java
Impact (%) -1.21 -0.38 -0.27 -0.23 -0.21 -0.07 -0.07 -0.05 -0.05 -0.05
Electricity Share (%) 15.00 13.40 1.50 0.20 23.10 1.00 1.30 0.30 8.20 21.00
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).
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).
NAD 74.9% North Sumatera 69.3% South Sumatera 49.8% West Sumatera 68.7% Jambi 48.8% Bengkulu 50.1% Lampung 47.6% Banten 72.1% Riau + Kepri 54.6% Central Kalimantan 44.3% East Kalimantan 68.4% Gorontalo 48.7% North Sulawesi 66.6% North Maluku 47.8%
West Kalimantan 45.5% Bangka Belitung 72.5% DKI Jakarta 100% South Sulawesi 54.9% South Kalimantan 71.4%
Central Sulawesi 47.6%
Southeast Sulawesi 38.2% Bali 74.4%
Maluku 55.4%
West Java 64.9%
Central Java 70.6%
Jogya 79.6%
East Java 71.1%
NTB 31.9%
NTT 24.3%
Papua + West Papua 32.1%
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) Office of Chief Economist Page 38 of 44
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%.
(IDRbn) 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 2005 Total 2006 Java 2007 2008 Outside Java 2009
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).
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.
Page 39 of 44
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.
Page 41 of 44
MACRO ECONOMIC INDICATORS AND FORECAST

2004 National Output (Summary) Real GDP (% yoy) GDP (Rp tn) - nominal GDP (US$ bn) - nominal GDP per capita (US$) - nominal National Output (By Expenditure), % yoy Domestic Demand (% yoy) Real Consumption: Private (% yoy) Real Gross Fixed Capital Formation (% yoy) Government Expenditure (% yoy) National Output (By Sector), % yoy Agriculture, Livestock, Forestry and Fisheries (ALFF) Mining and Quarrying Manufacturing Industries (Mfg) Electricity, Gas and Water Supply Construction Trade, Hotel & Restaurant Transport and Communication Financial, Ownership and Business Services 5.1 2,296 256 1,181 2005 5.7 2,774 285 1,298 2006 5.5 3,339 364 1,641 2007 6.3 3,951 432 1,922 2008 6.1 4,951 511 2,242 2009 2010(f) 2011(f) 4.6 5,613 540 2,339 5.8 6,663 731 2,953 6.3 7,961 886 3,338
8.0 5.0 14.7 4.0
5.0 4.0 10.8 6.6
4.5 3.2 2.9 9.6
6.0 5.0 9.2 3.9
7.4 5.3 11.7 10.4
5.5 4.9 3.3 15.7
6.9 5.2 8.6 12.8
7.2 5.3 10.7 9.5
2.8 (4.5) 6.4 5.3 7.5 5.7 13.4 7.7 5.4 2004
2.7 3.2 4.6 6.3 7.5 8.3 12.8 6.7 5.2 2005 19.7 24.0 17.5 0.3 0.3 47.3 34.7 5.3 9,751 9,830 57
3.4 1.7 4.6 5.8 8.3 6.4 14.2 5.5 6.2 2006 17.3 6.7 29.7 2.6 10.9 36.4 42.6 5.6 9,167 9,020 66
3.5 1.9 4.7 10.3 8.5 8.9 14.0 8.0 6.4 2007 13.1 21.8 32.8 0.4 10.5 32.7 56.0 7.1 9,139 9,400 72
4.8 0.7 3.7 10.9 7.5 6.9 16.6 8.2 6.2 2008 22.0 40.7 22.9 (0.1) 0.1 30.4 51.6 4.9 9,694 11,120 100
4.1 4.4 2.1 13.8 7.1 1.1 15.5 5.1 6.4
3.4 3.2 3.9 7.2 7.3 8.9 11.7 5.1 5.5
3.9 2.7 5.0 14.9 8.0 6.2 15.0 6.4 6.2
2009 2010(f) 2011(f) (15.0) (25.0) 35.2 1.9 10.7 32.5 66.1 8.5 10,399 9,400 62 24.2 40.3 30.2 0.9 7.0 24.5 80.0 7.6 9,112 8,927 85 19.1 24.9 29.1 0.3 2.6 20.2 83.0 6.4 8,986 9,083 90
External Sector Exports (%yoy,US$) - Merchandise Imports (%yoy,US$) - Merchandise Trade Balance (US$ bn) Current Account (% of GDP) Current Account (US$ bn) External Debt (% of GDP) International Reserves (US$ bn) Import cover (months) Rp/US$ (period average) Rp/US$ (year end) Oil Price (WTI, Average, US$/barrel) Other BI rate (% period average) BI rate (% year end) Headline Inflation (% yoy) Fiscal Balance (% of GDP) S&P's Rating - FCY S&P's Rating - LCY
17.2 42.9 20.2 1.2 1.6 55.3 36.3 7.3 8,985 9,290 42
7.4 7.4 6.4 (1.2) B+ BB
9.2 12.8 17.1 (0.9) B+ BB
11.9 9.8 6.6 (1.1) BBBB+
8.6 8.0 6.6 (1.3) BBBB+
8.7 9.3 11.1 (0.1) BBBB+
7.1 6.5 2.8 (1.6) BBBB+
6.6 7.0 5.9 (1.4) BB+ BBB-
7.5 7.5 6.6 (1.5) BBBBBB-
Page 42 of 44
INDONESIA CURRENT DATA

Indicators Unit 2007 2008 July Exchange Rate End of Period Average Monetary Sector Base money M0, eop Narrow money M1 Broad Money M2 Outstanding Loan Outstanding Deposit 1-month SBI rate Lending rate (working capital) 3-month deposit rate, eop Overnight rate, eop Prices Headline CPI (2007=100) Year on year inflation rate Month on month inflation rate Year to date inflation rate Wholesale Price Index (2000=100) 2009 Ags Sep Okt Nop Des Jan Feb 2010 Mar Apr
IDR/USD IDR/USD
9393 9354
10900 1167
9950 10119
10113 10001
9663 9857
9585 9491
9468 9464
9390 9462
9348 9284
9335 9344
9100 9167
9013 9029
IDRtn IDRtn IDRtn IDRtn IDRtn % p.a % p.a % p.a % p.a
379.58 450.06 1,649.66 995.11 1,459.44 8.00 13.00 7.42 4.50
344.69 456.79 1,883.85 1,313.87 1,673.82 10.95 15.22 11.97 9.40
322.85 471.17 1,963.18 1,340.87 1,759.57 6.77 14.45 8.54 6.57
324.66 490.13 1,995.29 1,368.19 1,794.26 6.59 14.30 8.03 6.19
354.30 490.02 2,018.03 1,369.49 1,807.06 6.52 14.17 7.85 6.36
364.87 485.54 2,021.52 1,381.88 1,815.05 6.48 14.09 7.18 6.39
376.94 495.06 2,062.21 1,403.80 1,849.57 6.48 13.96 7.03 6.48
402.12 515.82 2,141.38 1,446.81 1,914.11 6.46 13.69 6.85 6.24
384.18 494.70 2,108.86 1,414.26 1,861.46 6.45 13.75 7.33 6.24
380.14 496.53 2,066.48 1,436.35 1,854.12 6.42 13.68 7.14 6.15
374.41 494.90 2,082.09 1,876.04 6.37 13.54 7.09 6.15
385.43
6.20
6.17
Index % % % Index N/A
155.5 6.59 1.1
113.86 11.06 -0.04 11.06
114.61 2.71 0.45 0.66 163
115.25 2.75 0.56 1.22 165
116.46 2.83 1.05 2.28 167
116.68 2.57 0.19 2.48 164
116.65 2.41 -0.03 2.45 165
117.03 2.78 0.33 2.78 166
118.01 3.72 0.84 0.84 167
118.36 3.81 0.30 1.14 167
118.19 3.43 -0.14 0.99 168
118.37 3.91 0.15 1.15
217
238.0
Trade Export Oil Non oil Import Oil Non oil Trade Balance Output GDP (current price) GDP (constant price at 2000) Real Growth Capital Market JCI Index, eop Volume, avg Value, avg Consumer Confidence Index
USDbn USDbn USDbn USDbn USDbn USDbn USDbn
10.86 2.51 8.36 6.81 2.39 4.42 4.06
8.69 1.24 7.45 6.29 0.98 5.31 2.40
9.68 1.49 8.20 8.68 1.84 6.85 1.00
10.54 1.65 8.89 9.71 1.52 8.19 0.84
9.84 1.75 8.09 8.52 2.37 6.15 1.33
12.24 2.11 10.13 9.47 1.92 7.55 2.78
10.78 2.34 8.44 8.81 1.83 6.98 1.96
13.35 2.50 10.85 10.33 2.10 8.22 3.02
11.60 2.34 9.25 0.95 0.20 0.76 10.64
11.20 2.18 8.99 0.95 0.21 0.74 10.25
12.63 1.98 10.65 1.10 0.23 0.88 11.53
IDRtn IDRtn % YoY
1034.86 493.37 5.88
1274.29 518.94 5.20
1459.80 561.00 4.16
1450.82 547.54 5.43
1498.72 558.12 5.69
Index shares mn IDRbn
2745.83 3155.65 4340.55 99.10
1355.41 1743.25 1454.61 90.60
2323.24 5304.81 4105.06 115.40
2341.54 6028.98 5405.14 114.30
2467.59 3769.08 3315.11 110.80
2367.70 4325.02 3896.65 110.00
2415.84 4287.63 3566.64 111.00
2534.36 3422.10 2332.42 108.70
2610.80 4462.40 3599.15 110.50
2549.03 3661.76 2711.71 105.30
2777.30 4350.70 3546.06 107.40
2971.25 5823.34 5030.07 110.70
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.
Page 43 of 44
Head Office
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
Overseas Offices
Hongkong Branch th 7 Floor, Far East Finance Centre 16 Harcourt Road, Hongkong Tel: 852-2527-6611 Fax: 852-2529-8131
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
Singapore Branch 3 Anson Road #12-01/02, Springleaf Tower Singapore 079909 Tel: 65-6213-5688 Fax: 65-6438-3363
Cayman Islands Branch rd Cardinal Plaza 3 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 nd Cardinal Court (2 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 Peoples 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
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Page 44 of 44

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OFFICE OF CHIEF ECONOMIST

Fertilizer Industry in Indonesia

Impact of Electricity Tariff Increase: A DyRec-CGE Analysis

National Electricity Consumption (GWh)

Total (RHS) Industrial (LHS)

Social Institutional (LHS) Business (LHS)

Household (LHS) Public (LHS)

Fear Factor 2010: European Sovereign Risk

Economic recovery is progressing stronger than expected

Office of Chief Economist

Area World Euro Area UK US Japan China India ASEAN-5

2007 5.1 2.7 2.6 2.0 2.3 13.0 9.4 6.3

2009 -0.8 -3.9 -4.8 -2.5 -5.3 8.7 5.6 1.3

Office of Chief Economist

ECB BOE BOJ

6 4 2 0 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11

wide divergence of economic performance also implies different policy stance

8 7.5 7 6.5 6 5.5 5 4.5 4.5 4

Office of Chief Economist

Office of Chief Economist

Greece Portugal Ireland Italy Spain UK US

Greece Portugal Ireland Italy Spain

Greece Portugal Ireland Spain Italy

347 120 Greece 58.5 Portuga l 38 Irel a nd Spa i n Ita l y Tota l

Portugal Italy Ireland Greece Spain

Global Financial Shock

Office of Chief Economist

the road is still a long way to go.

Asset Bubble Sovereign Risk

the fiscal crisis in Europe has yet to take its toll.

140 120 100 80 60 47 45 40 20 0

Office of Chief Economist

40% 35% 30% 25% 20%

Jan-08 Jun-08 Nov-08 Apr-09 Sep-09 Feb-10

3,592 2,253 5,567 -4,775

-1,876 3,419 1,721 -7,309

1,502 453 1,859 - 829

- 1,757 400 1,959 - 4,144

2,523 472 2,988 -970

1,405 988 3,298 -2,896

3,673 2,313 10,103 - 8,838

400 3,000 5,000 - 2,000

Office of Chief Economist

Office of Chief Economist

Fertilizer Industry in Indonesia: Raw Materials Continue to be the Main Obstacle

dominated by urea fertilizer (69.2%)

Office of Chief Economist

Domestic Consumption of Fertilizer (Mn Ton) 8.24 8.66

Agriculture Sector Fertilizer Consumption by Type (%)

25.7 29.9 23.6 23.5

NPK 14.3% ZA 9.4% TSP/SP36 7.1% Urea 69.2%

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

Office of Chief Economist

3 Depreciation Raw materials Wages & salary

Office of Chief Economist

Office of Chief Economist

Banten, DKI Jakarta, Jawa Barat, Jawa Tengah II

Office of Chief Economist

1974 1976 1977 1993

1972 1984/1986 1979/1983 1995 1999 2004 2004 2006 2008

1979 2005 1984 1985/1989 1999 2002