Indonesia Commercial Banking Report Q1 2008

From Q108 we will be calculating the Commercial Banking Business Environment Rating (CBBER) for each of the countries surveyed by BMI. This will permit a more systematic and comprehensive comparison of the conditions within the banking industries of the various countries than was possible in the past. For each country, it will also facilitate a comparison of the conditions within the banking sector and conditions prevailing in other sectors.

Indonesia's overall CBBER is 58.1. The equivalent figures for the US and the eurozone are 84.8 and 81.4, respectively. Within the region, Indonesia's figure may be compared with Hong Kong's impressive top score of 79.5, and Sri Lanka's score of 28.4, the lowest in the region. In relation to other countries surveyed by BMI, Indonesia is a country where total assets are fairly small; the likely growth in total assets is reasonably tame; the expected growth in client loans is moderate; and there is very little potential for banks to earn fees from distribution of insurance products and other activities. Indonesia has a midrange CBBER as compared to other Asia Pacific countries surveyed by BMI. Instrumental in keeping this figure down is Indonesia's low per-capita GDP figure, comparable with the poorer countries in the Asia- Pacific region.

GDP grew by 6.3% in Q207, the country's fastest year-on-year (y-o-y) expansion in two years. Monetary policy has been supportive of economic growth, as has a resilient export sector. Even though growth is forecast to reach its fastest rate in a decade this year, a weak infrastructure still hampers Indonesia's potential, and threatens the country's competitiveness abroad. Indonesia's economy is firmly on track to meet our year-end GDP estimate of 6.2% in 2007. Bank Indonesia (BI)'s five interest rate cuts in 2007 have been supportive of growth. Leading indicators suggest that Indonesians are taking out more loans to finance purchases (cement sales rose by 11% y-o-y in July 2007, while motorcycle and car sales rose by 13% and 60%, respectively), and as a result both local and foreign companies, eager to get in on the action, have upped investments in the region.

While we hold a positive view of Indonesia's economic fundamentals, we caution that there will be some fallout resulting from the current global credit crisis. The US subprime market fallout will render fundraising activity, be it in the public or private sector, much more costly for high-risk economies like Indonesia's. There is a strong chance, therefore, that growth could have been affected in H207. Overall however, our projections are playing out, and with no major policy changes expected to be implemented ahead of the 2009 general elections, we find no reason to adjust our long-term economic outlook for Indonesia. Therefore we continue to forecast a gradual deceleration in the GDP growth rate to 5.6% at the end of our forecast period (2007-2012).