Indonesia

SEB MERCHANT BANKI NG – COUNTRY RI SK ANALYSI S August 29, 2008

important your attention is drawn to the statement on the back cover of this report which affects your rights.
Analyst: Rolf Danielsen. Tel : +46 8 763 83 92. E-mail : rolf.danielsen@seb.se

The economy has surprised on the upside with growth exceeding 6% pa. so far in 2008, but rising
inflation and fear of overheating have prompted the central bank to hike interest rates. Foreign
investors have welcomed recent reforms to fight corruption and improve the business climate.

Country Risk Analysis
Strnng exµnrts and dnmestic demand buny the ecnnnmy tn the µnint nI nver-
stretch. IoIIoving acceIeraling aclivily in 2007 as grovll picIed up lo 6,3° from
5,5° lle preceding year, economic expansion conlinued al a brisI cIip inlo lle firsl
laIf of 2008. Lxporls acceIeraled and combined vill slrong domeslic demand for
boll consumplion and inveslmenl goods. Tlal vas in response lo monelary poIicy
easing. In 2007, lle cenlraI banI beIieved il lad gained conlroI over price
deveIopmenls seeing leadIine infIalion faIIing bacI lo lle largel IeveI belveen 5-7°.
Tlal easing lad foIIoved a period of monelary ligllening in response lo increased
voIaliIily in foreign exclange and money marIels in 2005, vlicl in lurn lad
coincided vill a slarp rise in infIalion lriggered by lle liIing of domeslic fueI
prices. In 2006, infIalion subsided and lle cenlraI banI venlured on a graduaI easing
vill lle Iasl cul in inleresl rales occurring in December 2007.

New bnut nI inIIatinn and credit
exµansinn µrnmµt mnnetary tightening.
Will lle benefil of lindsigll lle monelary
easing of 2006 and 2007 may nov appear
premalure and more so as il combined
vill incompIele sleriIizalion of lle baIance
of paymenl surpIus. Since Iale 2006, banIs
lad revived lleir Iending aclivily and
lovard lle end of 2007 credil expansion
lad reacled 27° yoy (year-on-year). As
credil expansion acceIeraled inlo lle firsl
quarler of 2008 and price pressure
mounled, lle cenlraI banI clanged lacI and finaIIy indicaled ligller monelary
condilions by a 0,25° inleresl rale liIe in May. During lle firsl quarler of 2008, lle
CII increased lo 8° yoy, and acceIeraled lo aImosl 12° yoy in IuIy. Ior sure, llal
refIecled nol onIy sIyrocIeling credil grovll and ligl capacily uliIizalion in
induslry bul aIso lle impacl of rising gIobaI commodily prices.
Policy Interest rates (1M)
Bank credits to private sector
Source: Reuters EcoWi n
2005 2006 2007 2008
%

g
r
o
w
t
h

p
a
.

5
10
15
20
25
30
35
Interest rate
Credit growth

But higher rates may have started tn bite and cnmmndity µrices shnuId have
µeaked. Tlree subsequenl rale liIes lave raised poIicy rales by 1 percenlage poinl
(pp) and credil indicalors suggesl llal ligller monelary condilions are beginning lo
bile. In IuIy, credil expansion sIoved lo 32° yoy from 34° in Iune. Tlose are sliII
SEB Merchant Banking Country Risk Analysis August 29, 2008

2
ligl bul Iover llan al lle beginning of lle year in reaI lerms. InfIalion, lovever,
may sliII cIimb. Ior a Iong lime subsidies suppressed mucl of lle infIuence from
ligler energy prices, bul in May lle governmenl vas forced lo raise domeslic fueI
prices by 29°. Tlal las yel lo see ils fuII pass-llrougl inlo leadIine infIalion.
Lxpeclalions are nov for CII infIalion lo peaI al 13° by year-end, before sIoving lo
singIe digils lerrilory in Iale 2009 facloring in nol onIy lle cooIing of domeslic
aclivilies bul aIso sofler inlernalionaI prices of rav maleriaIs, food sluff and oiI.

FiscaI µnIicy cnntinues nveraII steady. WliIe recenl years' monelary poIicies may be
deemed loo Iax and lle cenlraI banI reaclive raller llan proaclive, fiscaI poIicies
lave remained overaII sleady despile some veaIening. In 2007, lle fiscaI baIance
ended in a deficil of 1,2° of GDI. Tlal vas 0,9 pp ligler llan in 2005 and
expeclalions are for a furller rise of 0,5pp llis year. Higler fueI subsidies expIain a
parl of llis veaIening as domeslic prices lave remained cIearIy beIov inlernalionaI
marIel prices. Tlal is sliII lle case even afler a lefly price adjuslmenls in Iasl May.
Hovever, provided oiI prices lave passed lle cycIicaI peaI llis lime around, slarp
veaIening of lle fiscaI is IiIeIy lo be avoided in 2009, and mosl observers foresee lle
deficil being conlained villin 2° of GDI, ensuring lle conlinued reduclion of
governmenl debl/GDI ralio lo 33° al end 2009.

ExternaI baIance remains heaIthy.
Ieriods of easy money,
nolvillslanding, lle baIance of
paymenls remained slrong in 2007,
and 2008 is IiIeIy lo see onIy a
moderale veaIening due lo decIining
nel capilaI infIovs. In 2007, rising oiI
prices and slrong grovll in exporls
marIels supporled a sleady surpIus of
lle currenl accounl baIance al $10 biII.
--aboul lo 2° of GDI. Slrong capilaI
infIovs lo lle IocaI slocI and bond marIels and from foreign direcl inveslors
compensaled $16 biII. of Iong lerm Ioans faIIing due. Tlal aIIoved lle cenlraI banI
lo add $10 biII. lo ils reserves, raising lleir IeveI lo lle equivaIenl of 6 monlls of
imporls. In 2008, llese lrends conlinued. Lxporls performed veII as ligler oiI
prices compensaled reduclion of oiI exporl voIumes caused by lle naluraI depIelion
of maluring oiI fieIds. Conlinued slrong demand from Asian lrading parlners,
incIuding India and Clina, aIso leIped suslain non-oiI exporls in face of veaIer US
demand. On lle imporl side, buoyancy vas no Iess impressive, Ieaving lle lrade
surpIus aboul unclanged in lle firsl laIf of lle year, and lle currenl accounl surpIus
perlaps sIigllIy up as supporled by a more favorabIe services and income baIance
and slrong grovll of vorIers remillances from abroad. Ior lle remainder of 2008,
exlernaI lrade fIovs are sel lo veaIen in boll direclions excepl oiI exporls as
slipmenls increase from lle nev Cepu fieId. As a resuIl lle currenl accounl slouId
see a smaII improvemenl lo $13 biII, equivaIenl lo 2,6° of GDI. Tle baIance of
paymenl surpIus, by conlrasl, couId slrinI sIigllIy lo $7 biII due lo slarpIy reduced
nel porlfoIio infIovs lo a slocI marIel llal so far in 2008 las performed aImosl as
poorIy as lle average of aII emerging marIels. As a resuIl of rapid repaymenls,
foreign debl (83° Iong lerm) slouId faII lo 26° of GDI.
Foreign trade
Source: Reut ers EcoWin
jan apr jul okt jan apr
2007 2008
C
u
r
r
e
n
t

a
c
c
o
u
n
t

b
a
l
a
n
c
e

(
$

b
i
l
l
.
)
0,7
0,8
0,9
1,0
1,1
1,2
E
x
p
o
r
t
s
,

I
m
p
o
r
t
s

(
$

b
i
l
l
.
)
8,0
8,5
9,0
9,5
10,0
10,5
11,0
11,5
12,0
12,5
13,0
Exports
CA bal ance

The gnvernment rekindIes the reInrm µrncess. Since Iong, inveslors lave slied
Indonesia despile improved grovll. Tlal is because of ils repulalion as a difficuIl
pIace for business, bul llal may nov be aboul lo clange. In 2007, lle governmenl

SEB Merchant Banking Country Risk Analysis August 29, 2008

3
inlroduced a sIev of business friendIy IegisIalion, incIuding a nev inveslmenl Iav
llal slouId provide grealer cIarily and equaIized lrealmenl for domeslic and foreign
inveslors. Tlis slouId aIIeviale concerns regarding added red lape and uncerlainly
due lo IocaI IeveI bureaucracy in lle inveslmenl process even llougl some obslacIes
viII remain incIuding onerous Iabor Iavs and ligl minimum vages. Moreover, nev
lax Iavs slouId leIp reduce corruplion by curbing lle pover of lax officiaIs al
various adminislralive IeveIs. In 2007 lle governmenl aIso inlensified ils figll
againsl corruplion by removing lvo minislers impIicaled in aiding fund lransfers for
lle youngesl son of lle Iale Mr. Sularlo. Tlal marIed lle governmenl's firsl major
success in punisling persons cIose lo lle former presidenliaI famiIy, vlicl lad
ruIed Indonesia vill diclaloriaI povers for more llan a generalion up lo 1998.

AIthnugh stiII IragiIe, µnIiticaI stabiIity and demncracy are IikeIy strengthening.
During lis lime in office since eIeclions in 2004, Iresidenl Yudloyono las graduaIIy
consoIidaled lis pover and lle incumbenl is expecled lo vin nev eIeclions due in
2009. Mucl inleresl nov focuses on parly parlicipalion in a possibIe nev coaIilion
governmenl. Tle presenl governmenl incIudes various slrains of poIilicaI Iife and as
sucl las been abIe lo inlernaIize poIilicaI probIems confIicls incIuding vill lle
presidenl's adversary, lle GoIIar parly of lle former Sularlo regime. Tle coaIilion
incIudes aIso lle IsIamisl Irosperous and Iuslice Iarly vlicl is rapidIy gaining
popuIarily lo lle groving concern in some quarlers aboul lle rise of IsIamic
fundamenlaIism and lle groving numbers of provinces llal adopl syarial inspired
IocaI Iavs. Observers nole llal ligl unempIoymenl and videspread poverly couId
provide ferliIe grounds for popuIisl and/or exlremisl movemenls. A nalionaI survey
of 2006 reporledIy sloved llal onIy 12° vanled an IsIamic counlry, lovever.
--´--
oÉÅÉåí=ÉÅçåçãáÅ=íìêÄìäÉåÅÉ=ÇìÉ=íç=êáëáåÖ=áåÑä~íáçå=Å~ìëÉÇ=Äó=íçç=ä~ñ=ãçåÉí~êó=
éçäáÅáÉë=áå=OMMSLMT=Ü~ë=ëçãÉïÜ~í=Ç~ã~ÖÉÇ=íÜÉ=éáÅíìêÉ=çÑ=ÉÅçåçãáÅ=ëìÅÅÉëë=~ë=
êÉÑäÉÅíÉÇ=áå=ëíêçåÖ=ÖêçïíÜ=~åÇ=çîÉê~ää=ÜÉ~äíÜó=ÉñíÉêå~ä=~åÇ=ÑáëÅ~ä=ÇÉîÉäçéãÉåíëK==qÜÉ=
áããÉÇá~íÉ=ÑìíìêÉ=áë=íÜÉêÉÑçêÉ=äáâÉäó=íç=ÄêáåÖ=Öê~Çì~ä=ÅççäáåÖ=~ë=ãçåÉí~êó=éçäáÅáÉë=
íáÖÜíÉå=íç=ÄêáåÖ=Ççïå=áåÑä~íáçåK==cçêíìå~íÉäóI=íÜÉ=ÖçîÉêåãÉåí=ä~ëí=óÉ~ê=êÉâáåÇäÉÇ=íÜÉ=
êÉÑçêã=éêçÅÉëëI=ïÜáÅÜ=Ü~ë=áåÅêÉ~ëÉÇ=íÜÉ=~ííê~ÅíáîÉåÉëë=çÑ=fåÇçåÉëá~=~ë=~å=
áåîÉëíãÉåí=ÇÉëíáå~íáçå=Ñçê=Éñéçêí=ÅçãéÉíáíáîÉ=ã~åìÑ~ÅíìêáåÖI=~ÖêáÅìäíìêÉI=ãáåáåÖ=
~åÇ=çáäLÖ~ëK==tÉ=ÄÉäáÉîÉ=íÜ~í=íÜÉ=ê~íáåÖ=~ÖÉåÅáÉë=ã~ó=óÉí=Ü~îÉ=íç=êÉÑäÉÅí=íÜÉëÉ=
áãéêçîÉãÉåíë=áå=íÜÉáê=ëçîÉêÉáÖå=ê~íáåÖK==få=~=Åçìåíêó=êáëâ=éÉêëéÉÅíáîÉI=ÜçïÉîÉêI=íÜÉ=
ÄìëáåÉëë=ÉåîáêçåãÉåí=áë=çÑíÉå=âÉóI=ïÜáÅÜ=áë=é~êíáÅìä~êäó=êÉäÉî~åí=áå=íÜÉ=ÅçåíÉñí=çÑ=
fåÇçåÉëá~K=
Key ratios 2008
Population (mill.) 234
GDP/capita ($) 2240
GDP (change) 6%
Inflation 11%
Curr.Acc. Balance/GDP 3%
Reserves/imports (months) 6
Budget balance/GDP -1%
Government debt/GDP 35%
Graph: The pentagon shows the creditworthiness profile of
Indonesia similar to that of the Philippines, although
weaker on most accounts. That includes resilience,
reflecting issues such as governance and corruption. The
macro balances is a relative strength.
ExternaI ratings:
Iilcl: BB
S&I: BB-
Peers:
UIraina
IliIippines
Vielnam
0
2
4
6
8
10
12
Resilience
Liquidity
Information
Absence of event
risk
Macro balance
Indonesia Average EM
Philippines
How to read the chart?
Moving out from the center
reduces risk.


SEB Merchant Banking Country Risk Analysis August 29, 2008

4

Key data: 2003 2004 2005 2006 2007 2008 2009 2010
GDP (mill.US$) 235 017 256 712 285 436 364 396 433 201 525 124 595 152 658 423
GDP/capita (US$) 1067 1150 1263 1592 1870 2240 2508 2742
GDP (change) 4,8% 5,0% 5,7% 5,5% 6,3% 5,7% 4,8% 5,6%
Investments/GDP 20% 21% 22% 22% 22% 24% 25% 24%
Budget balance/GDP -2% -1% -1% -1% -1,2% -1,3% -1% -1%
Govt debt/GDP 57% 47% 39% 37% 35% 33% 31%
CPI inflation (%) 6,8% 6,1% 10,5% 13,1% 6,4% 10,9% 10,1% 6,6%
Money demand (%) 6% 7% 12% 15% 16% 13% 8% 9%
Stock prices (%change) 13% 56% 37% 31% 53%
Interest rates 9,5% 7,4% 9,6% 11,6% 8,4% 8,6% 8,8% 8,1%
Exch. Rate ($) 8574 8940 9710 9167 9133 9217 9289 9399
Trade/GDP (%) 44% 47% 55% 49% 47% 50% 47% 45%
Oil price (Brent) $29 $38 $54 $65 $73 $117 $113 $101
Millions US $
Export of goods 64 108 70 766 86 995 103 528 118 014 149 012 156 938 165 304
Imports of goods 39 546 50 615 69 463 73 867 85 295 116 080 123 104 129 298
Other: -16 457 -18 588 -17 255 -18 826 -22 354 -19 487 -19 228 -18 929
Current account ($ mill) 8 105 1 563 277 10 835 10 365 13 445 14 606 17 077
(% of GDP) 3,4% 0,6% 0,1% 3,0% 2,4% 2,6% 2,5% 2,6%
FDI -597 -1 512 5 272 2 210 2 138 3 272 3 983 4 222
Loan repayments -14 263 -15 604 -12 407 -16 280 -16 427 -16 093 -16 244 -13 877
Net other capital flows 11 031 17 363 4 958 9 549 14 061 6 900 1 931 -2 345
Balance of payments 4 276 1 810 -1 900 6 313 10 138 7 524 4 276 5 077
Reserves 32 714 34 524 32 624 38 938 49 075 56 600 60 876 65 953
Total debt 135 224 138 372 133 969 130 863 134 833 137 470 138 320 139 259
o/w short term debt 22 866 23 901 27 688 31 725 24 846 25 046 25 247 19 093
Source: OEF (Oxford Economic Forecasting) and SEB estimates.
Rating history
Fitch (eoy) B- B B+ B+ BB-
Moody's (eoy) B3 B3 B2 B2 B2+
S&P (eoy) CCC CCC B- B+ BB-
Type of government: Parliamentary Democracy
Next elections 2009
Other:
Latest PC deal 2005
Latest IMF arrangements 2003 SBA
B a nk c red its to pr iv ate s ecto r
S ource: R euters EcoWi n
1 9 9 4 1 9 9 6 1 9 98 2 0 0 0 2 0 0 2 2 0 0 4 2 0 0 6 2 0 0 8
I
D
R

(
1
0
*
*
(
1
5
)
)
0 ,1
0 ,2
0 ,3
0 ,4
0 ,5
0 ,6
0 ,7
0 ,8
0 ,9
1 ,0
1 ,1
1 ,2
Asi an cris is
International reserves
Source: Reuters EcoWi n
2005 2006 2007 2008
U
S
D

(
b
i
l
l
i
o
n
s
)
0
10
20
30
40
50
60
70
Risk Premium (spread)
EMBI Plus, Composite EMBI Global, Indonesia
Source: Reuters EcoWin
04 05 06 07 08
B
a
s
i
s

P
o
i
n
t
s
100
200
300
400
500
600
Lost advantage since market turbu
Indonesia
Average
Jakarta Stock Exchange
S ource: Reuters E coWi n
97 98 99 00 01 02 03 04 05 06 07 08
I
n
d
e
x
250
500
750
1000
1250
1500
1750
2000
2250
2500
2750


SEB Merchant Banking Country Risk Analysis August 29, 2008

5

Disclaimer

Confidentiality Notice

The information in this document is confidential and may not be reproduced or redistributed
to any person.

Important: This statement affects your rights

The information in this document has been compiled by SEB Merchant Banking, an entity
within Skandinaviska Enskilda Banken AB (publ) (“SEB”), for institutional investors only. It
is not intended for, and must not be passed to, Retail Clients. If you are not a client of ours,
you are not entitled to this report. This information is produced for the private information of
recipients, and SEB Merchant Banking is not soliciting any action based upon it.

Opinions contained in this report represent the bank’s present opinion only and are subject to
change without notice. All information contained in this report has been compiled in good
faith from sources believed to be reliable. However, no representation or warranty, expressed
or implied, is made with respect to the completeness or accuracy of its contents and the
information is not to be relied upon as authoritative. Recipients are urged to base their
investment decisions upon such investigations as they deem necessary. This document is
being provided for your information only, and no specific actions are being solicited as a
result of it; to the extent permitted by law, no liability whatsoever is accepted for any direct or
consequential loss arising from use of this document or its contents.

Your attention is drawn to the fact that a member of, or an entity associated with, the bank or
its affiliates, officers, directors, employees or shareholders of, such members may from time
to time (a) have a long or short position in, or otherwise participate in the markets for, the
currencies and securities of countries mentioned herein, (b) buy or sell, make a market (or
provide liquidity) in, or participate in an issue of such securities or options, for which SEB
may receive compensation

SEB is a public company incorporated in Stockholm, Sweden, with limited liability. It is a
member of the Stockholm Stock Exchange, the London Stock Exchange, the IPE, OM, EDX,
Euronext Liffe, Euronext Paris, Eurex, CME, and CBOT exchanges. SEB is authorized and
regulated by Finansinspektionen in Sweden, by the Financial Services Authority for the
conduct of designated investment business in the UK, and by relevant regulators in all other
jurisdictions where SEB operates its business.


SEB Merchant Banking. All rights reserved.