ASEAN-JAPAN Centre

Tokyo, December 13th 2016

Central Bank Policy in Support of Stability & Growth1

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2

Macroeconomic performance: GDP Balance of Payments Inflation and Exchange Rate Financial Intermediation Market Risks Capital Market

BANK INDONESIA Policy Mix: Managing Non-Bank Corporation External Debt Obligation to use Rupiah Domestically Relaxing LTV and FTV Lines of Defense through Cooperation Redefining Policy Rate Comprehensive Financial Deepening Program

2

Growth Momentum Continues

By expenditure 2014 2015 2016

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

HH. consumption5.3 5.1 5.1 5.1 5.0 5.0 5.0 4.9 4.9 5.0 5.0

Non profit HH. consumption

23.2 22.4 5.8 (0.5) (8.1) (8.0) 6.6 8.3 6.4 6.7 6.7

Government consumption

6.1 (1.8) 1.2 0.9 2.9 2.6 7.1 7.3 2.9 6.3 (3.0)

Investment 5.2 4.1 4.5 4.6 4.6 3.9 4.8 6.9 5.6 4.6 4.1

Exports 3.2 1.4 4.8 (4.6) (0.6) 0.0 (0.6) (6.4) (3.9) (2.7) (6.0)

Imports 5.0 0.4 0.3 3.2 (2.2) (7.0) (5.9) (8.1) (4.2) (3.0) (3.9)

GDP 5.1 5.0 5.0 5.0 4.7 4.7 4.7 5.0 4.9 5.2 5.0

GDP Growth Based on Expenditures

GDP growth by sectors (YoY) (%)

2014 2015 2016

Q1 Q2 Q3 Q4 Yearly Q1 Q2 Q3 Q4 Yearly Q1 Q2 Q3

Agriculture, forestry, and fishery 5.2 4.9 3.6 3.3 4.2 4.0 6.9 3.3 1.6 4.0 1.8 3.4 2.8

Mining (1.0) 1.1 1.2 1.5 0.7 (1.3) (5.2) (5.7) (7.9) (5.1) (0.8) (0.1) 0.1

Industrial processing 4.5 4.8 5.0 4.2 4.6 4.0 4.1 4.5 4.4 4.2 4.6 4.7 4.6

Construction 7.2 6.5 6.5 7.7 7.0 6.0 5.4 6.8 8.2 6.6 7.9 6.2 5.7

Big traders, wholesale,retail 6.1 5.0 5.2 4.5 5.2 4.1 1.7 1.4 2.8 2.5 4.0 4.0 3.7

Transportation and warehousing 7.0 7.6 7.7 7.2 7.4 5.8 5.9 7.3 7.7 6.7 7.9 6.9 8.2

Information and communication 9.8 10.5 9.8 10.3 10.1 10.1 9.7 10.7 9.7 10.1 8.1 9.9 9.2

Financial service and insurance 3.6 5.5 1.9 7.9 4.7 8.6 2.6 10.4 12.5 8.5 9.3 13.6 8.8

Other 5.4 4.7 5.9 6.5 5.7 5.1 6.5 5.0 5.9 5.6 6.0 5.4 4.3

GDP 5.1 5.0 5.0 5.0 5.0 4.7 4.7 4.7 5.0 4.8 4.9 5.2 5.0

Contributors to GDP growth by Sector

%

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2014 2015 2016 Source: Central Bureau of Statistics of Indonesia (BPS)

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Structurally Stronger External Outturns

Strong Balance of PaymentsUS$bn US$bnUS$bn

0

20

40

60

80

100

120

140

160

-20

-15

-10

-5

0

5

10

15

20

Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1* Q3* Q1* Q3*

2010 2011 2012 2013 2014 2015* 2016**

Current Account Capital & Financial Account

Overall Balance Reserve Assets (RHS)

-15

-10

-5

0

5

10

15

Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1* Q3* Q1* Q3*

2011 2012 2013 2014 2015* 2016**

Goods Services Income Secondary Inc. Current Acc.

Source: Bank Indonesia-2.5-2.0-1.5-1.0-0.50.00.51.01.52.02.5

1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10

2014 2015 2016

Non-OG OG Total

US$bn Trade Surplus Continues

Narrowing Current Account DeficitUS$bn

115.7

9.4

5.7

(4.5)

(1.5)

3.9

1.0

(4.5)(7.9)

4

Inflation is under control

-1

4

9

14

19

1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10

2011 2012 2013 2014 2015 2016

CPI (%, yoy) Core (%, yoy)

Volatile Food (%, yoy) Administered (%, yoy)

Stable Rupiah Value

Source: Bank Indonesia

IDR/US$Exchange rate volatility is manageable

5

Credit is supportive to growth

4.2%6.5%

9.1%

YoY

0%

5%

10%

15%

20%

25%

30%

35%

40%

1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9

2013 2014 2015 2016

Total Growth Working Capital loansInvestment Loans Consumption Loans

8.0%

Financial Intermediation is Supporting Growth

NPL in the banking sector remains low

Banking’s CAR is suffciently high

Profitability of the banking sector is stable

6

Net open position in the banking sector is far below the maximum requirement (20%)

Investment value of Insurers & Pension Funds continues to expand

Multifinance companies’ exposures to foreign debt have generally been mitigated through hedging measures

Mutual funds’ net asset value (NAV) is in line with the stock market index, with much lower volatility

Manageable Risk Amidst Fluctuations

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Source: Bloomberg, IBPA, Indonesia Stock Exchange, Ministry of Finance

Both the stock & bond indices demonstrated a strengthening index in 2016

In line with the stabilizing IDR and improving domestic prospects, the government bond yield continues to decline

The IDX Composite Index is among the best-performing indices (ytd) in the region

Capital Market Demonstrate Strengthening Trend

Capital Markets Demonstrate Strengthening Trend

Yield (%)IDR tn

Despite uncertain external factor, favorable domestic environment attracts nonresident inflow especially in Q3

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(US$bn)

Private Sector External Debt(US$bn)

0

50

100

150

200

250

300

350

0

50

100

150

200

250

300

2005 2007 2009 2011 2013 2015* Feb2016*

Apr2016*

Jun2016*

Aug2016*

Public (Govt. & BI) Private Total (RHS)Total FCY Debt:

US$325.3 bn

Private Sector FCY Debt: US$163.1

bn

Source: Bank Indonesia

Regulation Key PointsPhase 1

Jan 1,2015 –Dec 31,2015

Phase 2Jan 1,2016

–Dec

31,2016

Phase 3Jan 1, 2017 and beyond

Object of Regulation Governs all Foreign Currency Debt

Hedging Ratio

< 3 months 20% 25%

> 3 – 6 months 20% 25%

Liquidity Ratio ( < 3 months) 50% 70%

Credit Rating Not applicable Minimum rating of BB-

Hedging transaction tomeet hedge ratio

not necessarily be done with a bank in Indonesia

Must bedone with a

bank in Indonesia

Sanction As of Q IV-2015 Applied

Prudent External Debt Management Oct 2014, Non-bank corporations holding external debt required to fulfil:

Minimum hedging ratio in order to mitigate currency risk

Minimum forex liquidity ratio to mitigate liquidity risk

Minimum credit rating to mitigate overleverage risk

Regulation update in Dec 2014 including among others: broadening coverage of components of FX Assets and Liabilities, extension of credit rating’s status validity period

1. Managing Non-Bank Corporations’ External DebtPrudent External Debt Management, Key Points

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2. Obligation to use Rupiah for Domestic TransactionTransactions among residents in foreign currency through domestic foreign exchange banks subsides

*) preliminary **) very preliminaryNote: excluding transaction with central bank, forex trade, depocits, overbooking transaction, transaction under threshold (USD10,000)

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3. Relaxing Loan to Value Ratio

Housing Loans (Mortgage) and Housing Financing Based on Murabahah and Istishna

Property type (m2)

Lending/Financing Facility

First Second Third

House

>70 m2 85% 80% 75%

22 - 70 m2 - 85% 80%

<21 m2 - - -

Apartment

>70 m2 85% 80% 75%

22 - 70 m2 90% 85% 80%

<21 m2 - 85% 80%

Home Shop/Office - 85% 80%

Housing Financing Based on MMQ and IMBT Contracts

Property type (m2)

Lending/Financing Facility

First Second Third

House

>70 m2 90% 85% 80%

22 - 70 m2 - 90% 85%

<21 m2 - - -

Apartment

>70 m2 90% 85% 80%

22 - 70 m2 90% 85% 80%

<21 m2 - 85% 80%

Home Shop/Office - 85% 80%

Effective from August 29th, 2016, Bank Indonesia relaxed the Loan to Value Ratio (LTV) and for Sharia Financing to Value Ratio (FTV) on mortgage

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FX Reserve Ample of level of FX reserves to buffer against external shock FX Reserves as of October 2016: US$115.0 billion

South Korea Established a 3 year KRW/IDR swap arrangement with the size of up to 10.7 trillion KRW / IDR 115 trillion in March 2014

Australia Exchange of local currencies between the two central banks of up to A$10 billion or IDR 100 trillion Effective as of December 15, 2015. The effective period will be three years, and could be extended by mutual consent of both

sides

First Line of Defence

Second Line of Defence

BI’s Existing Bilateral Currency Swap Arrangement (BCSA)

* In addition to the above facilities, Indonesia is entitled to access IMF facilities for crisis prevention to address potential (actual) BOP problem as part of IMF’s Global Financial Safety Net (GSFN) initiative. Such facilities include Flexible Credit Line (FCL) and Precautionary and Liquidity Line (PLL)

Japan US$ 22.76 billion swap line with the Bank of Japan currently in place The quantum of the swap line was increased from US$12 billion in December 2013

Chiang Mai Initiative

Multilateralization (CMIM)

Agreement

Entitled to a maximum swap amount of US$ 22.76 billion under the ASEAN+3 (Japan, China, and Korea) FX reserves pool created under the agreement

Came into effect in 2010 with a pool of US$120 billion Doubled to US$ 240 billion effective July 2014

Source: Bank Indonesia

4. Lines of Defense Against External Shocks

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Bank Indonesia will enhance the monetaryoperations framework that is supported by thedeepening of the financial markets in order tostrengthen the transmission of monetary policy.

BI RATE

BI Rate reflects monetary policy stance as atool to anchor economic agent’ inflationexpectations

BI Rate is used as a benchmark interest ratefor transactions in financial markets andeventually to influence general interest rate

BI Rate effectively affect banking interestrate

Excess liquidity due to massive capitalinflows post 2008 global financial crisis drawdown overnight interbank rates around DFRate. Meanwhile, the BI rate is currentlyaround 9-12 months OM instrument.

The shallow financial markets also inhibit thetransmission of monetary policy.

CHALLENGES

ENHANCEMENT

BI rate as reference rate

Challenges: Transmission of monetary policy is less effective

Enhancement of monetary operations framework

12 months (equivalent)

7 days

Non-Transactional

Transactional (Central Bank)

Not optimally reflected in money

market interest rates

Stronger relationship to the money market interest rates

Cost of being illiquid is lower, support financial deepening

BI rate BI 7-day repo rateOMO term structure

Character

Transmission

Financial DeepeningCost of being illiquid is too high, does not

support financial deepening

5. Redefining The Policy Rate as Anchor

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Financial Market Deepening Program

First Priority:Continuous Basis Market Development Coordination

Monitoring, match making, and

solution:• Repo

• Hedging

Money Market• Bank Indonesia Regulation (PBI) on Money Market

Encourage well-functioning money market (deep and efficient, risk mitigation, and market integrity),• Bank Indonesia Regulation (PBI) on Negotiable Certificate of Deposit (NCD)

Enrich money market instruments, encourage banks to raise long term funding, and acts as an alternative investment for investors• Bank Indonesia Regulation (PBI) on Commercial Paper

Alternative sources of financing for non-bank corporations, as well as an investment outlet for investorsFX Market• Swap Link Deposit

a combination of foreign currency deposits with FX Swap against the rupiah.• Dual Currency Deposit

a combination of assets (deposits) and derivatives (FX Options).

• Corporate Bonds• Government

Bonds• Other instruments

Supporting Regulations

Market Code of Conduct Certification of DealerStrengthening JIBOR

• More comprehensive code of conduct • The use of technology and public security

• Obligation on certification for dealers• Dealers’ training for certification

• Extension of window time• Increase in IDR nominal

• Lengthening tenor of up to 3 months

Inter-agency CooperationSigning of MoU on April 8th, 2016, between MoF, BI, and OJK on Coordination in the Context of Financial Markets

Development and Deepening to Support National Development Financing

This MoU is driven by the need for:• Sufficient development financing,• Financial markets deepening, and

• Good coordination among related institutions

6. Comprehensive Financial Deepening Program

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The BI Board of Governors agreed on 17 November 2016 to hold the BI 7-days Repo Rate at 4.75%, as well as the Deposit Facility at 4.00% and cut the Lending Facility rates to 5.50%

Holds the BI 7-day Repo

Rate at4.75%

Convinces that the transmission of

looser monetary and macroprudential

policies will continue and boost credit as

well as other financing growth to support stronger economic growth moving forward

Remains vigilant towards global developments, recovery signs ofUS economy and the possibilty of Federal Funds Rate (FFR) hike,

limited growth in advanced countries including the European

Union (EU), the possibility of China and India to drive the

global economy, also the continuation of the international commodity prices improvement

Continues to coordinate with the Government

with a focus on safeguarding supply

and distribution, especially of the basic

necessities, while managing inflation

expectations

Maintainsexchange rate stability in line

with the currency’s

fundamental value by

maintating market mechanisms.

Believes more muted growth in

the fourth quarter, in line with fiscal consolidation, at around 5% and projects for the

expanding growth in the 5.0-5.4% range in 2017.

Bank Indonesia: Most Recent Policy

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Enhancement of Reserve Requirement RatioImplementing Reserve Requirement Averaging in 2017

For further inquiries: Rahmat Hernowo (Mr.) , Deputy Director, Bank Indonesia,

Representative Office for East Asia, Tokyo

Email address : rachmad.h@bi.go.id

THANK YOU17

3.03.54.04.55.05.56.06.57.07.58.0

Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Okt-16 Nov-16LF Rate BI Rate BI-7Day RR Rate DF Rate

19 August 2016

LF rate 7.00

LF rate 5.50

DF rate 4.50BI7RR rate 4.75

BI rate 6.50

DF rate 4.00

BI7RR rate 5.25

Appendix: Redefining The Policy Rate as Anchor

Overnight Interbank Market (PUAB) Rates

BI 7RR Rate

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