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RUEATRS/DEPT OF TREASURY WASHINGTON DC
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RUEAIIA/CIA WASHDC

UNCLAS SECTION 01 OF 02 JAKARTA 007013 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EAP/MTS AND EB/IFD/OMA 
TREASURY FOR IA-JEWELL 
DEPARTMENT PASS FEDERAL RESERVE SAN FRANCISCO 
 
E.O. 12598: N/A 
TAGS: EFIN EINV ECON PGOV PREL ID
SUBJECT: INDONESIA SAYS IT WILL REPAY IMF EARLY 
 
¶1. (SBU) Summary. Indonesian President Susilo Bambang 
Yudhoyono (SBY) announced on May 23 that Indonesia would 
repay the USD 7.7 billion remaining of its standby reserve 
loan with the International Monetary Fund (IMF) three years 
ahead of schedule by 2007.  Bank Indonesia (BI) has 
reportedly proposed repaying half in 2006 and half in 2007, 
and is awaiting approval from the Ministry of Finance (MOF) 
and the Coordinating Ministry for the Economy.  Indonesia's 
IMF loan is at favorable rates, currently about 4.9 percent, 
and BI earns interest on the reserves, so the country will 
save little from early repayment.  However, the Government 
of Indonesia (GOI) may gain some political advantage in that 
early repayment may allow Finance Minister Sri Mulyani 
Indrawati to show her independence from the IMF (Mulyani 
worked as an Executive Director at the IMF before joining 
the Cabinet).  Timing of the repayment and a clear message 
will be important for the GOI to gain maximum political 
advantage from the move.  Thus far public communication has 
been stumbling.  End summary. 
 
¶2. (SBU) Indonesia has announced that it will repay the 
outstanding portion of its USD 7.7 billion standby reserve 
loan to the International Monetary Fund early, possibly in 
two payments, half this year, and half in 2007.  While 
rumors of early re-payment had been circulating since 
February, SBY made it official when he announced the 
decision at a May 23 meeting of the Provincial Governments 
Association in Lombok, West Nusa Tenggara.  Timing of the 
payments is still unclear but the first payment could be in 
the "coming few weeks", according to May 30 media reports 
quoting BI Governor Burhannudin Abdullah.  The Jakarta IMF 
office told us BI sent a letter to the MOF and the 
Coordinating Ministry for the Economy with its early 
repayment proposal and is awaiting a response before 
formalizing a timeline. 
 
¶3. (SBU) The early repayment issue first came up during a 
February 2006 Parliamentary hearing in which DPR members 
asked Mulyani for details about Indonesia's foreign debt. 
She reportedly provided interest rates and debt figures for 
the IMF loan among others and was surprised when the media 
interpreted her the next day as stating that Indonesia may 
repay the IMF early.  While Coordinating Minister for the 
Economy Boediono and BI officials were cautious at first, 
the idea gained momentum in the intervening weeks. 
 
A Slight Negative Spread on Standby Loan 
---------------------------------------- 
 
¶4. (SBU) Indonesia is currently the IMF's second largest 
borrower after Turkey.  The GOI currently has about USD 7.7 
billion outstanding to the IMF, which it has been repaying 
at a rate of about USD 1.5 - 2 billion per year.  At that 
rate, the GOI would have repaid the loan in full by 2010. 
The standby loan supports the Indonesia's foreign exchange 
reserves, which were at a comfortable level of USD 42.8 
billion as of the end of April, up from USD 31 billion in 
September 2005.  The standby loan has a floating interest 
rate updated weekly, currently about 4.9 percent, linked to 
three-month treasury bills in four currencies (US Dollar, 
British Pound, Japanese Yen, and the Euro.)  While BI is not 
transparent about what it earns on these reserves, the IMF 
believes it invests in short-term debt instruments and 
currencies to maintain maximum liquidity.  In 2005, BI 
earned about 3.6 percent on its reserves while paying about 
3.85 percent interest to the IMF.  BI currently estimates it 
has a slight negative spread of 0.3 percent based on 2005 
numbers, but the IMF believes it is probably close to 
neutral now give given the environment of rising interest 
rates. 
 
¶5. (SBU) A local analyst told us BI's rule of thumb is that 
it tries to hold enough reserves to cover about four months 
of total imports (approximately USD 25 billion) and official 
debt repayments falling due in the current year (USD 9.3 
billion), for a total of about USD 34 billion.  Should BI 
pay back half of its standby loan in the near future, 
reserves would fall to approximately USD 39 billion, 
assuming other conditions remain unchanged.  At this level, 
 
JAKARTA 00007013  002 OF 002 
 
 
BI would still have as much as USD 5 billion to defend a 
weakening rupiah and still maintain adequate reserve 
coverage.  Once Indonesia repays its IMF debt, the Jakarta 
IMF office said the formal trappings of post-program 
monitoring may stop, but IMF staff visits and policy 
dialogue would likely remain about the same. 
 
Will the GOI Play it Right? 
--------------------------- 
 
¶6. (SBU) Although few in the financial markets profess much 
concern about the plan to repay Indonesia's IMF debt given 
BI's ample reserve coverage, there are important timing and 
public relations factors.  Some observers worry the recent 
bout of emerging market volatility, the May 27 earthquake in 
Yogyakarta, and other factors make this a bad time to repay 
the IMF.  While the IMF has publicly welcomed the move, 
privately it urges caution.  "The timing of repayment needs 
to be from a position of strength to be advantageous," the 
Jakarta IMF office told us.  Another expatriate economist 
noted "the announcement needs to be loud and clear in order 
to gain political points.  Right now the GOI just seems to 
be stumbling along."  Some political observers have noted 
that President Yudyohono would have gained more mileage out 
of this move had he waited another year or so and done it 
closer to the election campaign.  A prominent Indonesian 
economist said, "BI needs to be clear now in its 
communications about what early repayment means, and how it 
will be advantageous.  Most in the public and the media do 
not understand it." 
 
Comment: Seeking Political Advantage 
------------------------------------ 
 
¶7. (SBU) With total anticipated savings an insignificant USD 
24 million a year, political factors are driving the 
decision for early repayment of Indonesia's IMF debt.  BI 
and the GOI have one eye on Brazil and Argentina's 2005 
decisions to repay their IMF debt early, and hope to show 
the public they are independent from an organization most 
Indonesians view with mistrust.  Mulyani has the most to 
gain since she has been dogged by charges she is too 
friendly with the IMF given her service as an IMF Executive 
Director from 2002-2004.  At the same time, the significant 
volatility in Indonesia's financial markets in the second 
half of May chastened the GOI and BI somewhat.  By dividing 
repayment into two tranches, BI can maintain some control 
over the repayment process, and if necessary, delay or 
cancel the second tranche. 
 
PASCOE