LIPPO-MAPLETREE - Lippo Malls Indonesia Retail Trust - Investor ...

Overview of Indonesia and its EconomyIn an effort to generate business activity, the Indonesian government reduced the benchmark interest rateof the one-month Central Bank Promissory Notes (or SBI) progressively in 2002. As a result, the SBI ratestood at an historical low in 2004 of around 7%. Despite the positive impact this had on consumptiongrowth and related sectors, the decline in the benchmark interest rate did not lead to similar drops in banklending rates.In 2005, the government decided to adjust the SBI rate to above 13% in order to support the Rupiah. Whilethis was reasonably effective, it placed greater burdens on the business environment. Declining inflationthrough 2006 and a more stable local currency saw the SBI rate decline to around 10% by the end of 2006.Prime lending rates, however, remained at around 15%.Based on EIU’s forecasts, interest rates are expected to decline over the course of 2007, albeit at a slowerrate than in 2006. Indonesia’s benchmark interest rate was lowered by 25 basis point to 9.5% in January2007. The scope for a confirmed lowering of interest rates in 2007 will be constrained by a narrowingdifferential with rates in OECD countries.Figure 1.7.3: Benchmark interest rate growth, 2001-200620.018.016.014.0Percentage12.010.08.06.04.0Prime Lending Rate1-Month Time Deposit Rate2.01-Month SBI Rate0.0Jan-01 Sep-01 May-02 Jan-03 Sep-03 May-04 Jan-05 Sep-05 May-06DateSource: Bank Indonesia1.7.8 Exchange ratesRising domestic interest rates and a declining inflation gap in the early 1990s encouraged strong inflows offoreign capital to the country. This was followed by an appreciation of the Rupiah in 1996. Unfortunately,this was short-lived as political events in the subsequent years caused investors to reassess Indonesia’spolitical risks. The Asian financial crisis orginated in Thailand and spread across South East Asia. Thisexacerbated concerns over political instability in Indonesia and destabilised the Rupiah.Since the crisis, the Rupiah has stabilised and it continued to strengthen in 2006, ending 2006 at anexchange rate of Rp. 9,020 per US$1.Table 1.7.10 Indonesian Rupiah exchange rate against the US dollar (middle rate, end-of-period)Year Rp./US$ Year Rp./US$1991 1,992 1999 7,1001992 2,062 2000 9,5951993 2,110 2001 10,4001994 2,200 2002 8,9401995 2,308 2003 8,4651996 2,383 2004 9,2901997 4,650 2005 9,8301998 8,025 2006 9,020Source: Bank Indonesia, 2006F-17