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RR RUEHCHI RUEHDT RUEHHM
DE RUEHJA #7340/01 1600906
ZNR UUUUU ZZH
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FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 5591
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INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
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UNCLAS SECTION 01 OF 05 JAKARTA 007340 
 
SIPDIS 
 
SIPDIS 
 
DEPT FOR EAP/MTS AND EB/IFD/OMA 
TREASURY FOR IA-JEWELL 
COMMERCE FOR 4430/GOLIKE 
DEPARTMENT PASS FEDERAL RESERVE SAN FRANCISCO 
DEPARTMENT PASS EXIM BANK 
 
E.O. 12598: N/A 
TAGS: EFIN EINV ECON PGOV ID
SUBJECT: INDONESIA - ECONOMIC AND FINANCIAL HIGHLIGHTS MAY 
2006 
 
 
¶1. Summary.  On May 31, the Central Bureau of Statistics 
(BPS) announced a slight increase in consumer price 
inflation, at 15.6 year-on-year (YoY) and 0.4 percent month- 
on-month (MoM).  BPS also announced on May 15 first quarter 
GDP growth of 4.6 percent YoY, the slowest pace in two 
years.  On May 9, Bank Indonesia (BI) cut its benchmark rate 
by a quarter point to 12.5 percent, after five months at 
12.75 percent, and maintained it at that level at its June 6 
monetary policy board meeting.  The Jakarta Stock Exchange 
(JSX) Composite Index fell by 15.2 percent from May 15 - 
June 8 in line with volatility in other emerging markets. 
After strong appreciation in the first quarter, the rupiah 
experienced significant volatility against the USD beginning 
in mid-May, hitting a four-month low of 9,420/USD on May 16. 
The rupiah closed at Rp 9,395/USD on June 8.  Moody's Rating 
Service upgraded Indonesia's sovereign bond rating from B2 
to B1 on May 19.  Also on May 19, Moody's raised the ratings 
of the constrained foreign currency debts and deposits of 
nine Indonesian banks to "stable."  On May 29, the 
Government of Indonesia (GOI) said it would repay its USD 
7.8 billion standby reserves loan to the International 
Monetary Fund (IMF) three years ahead of schedule.  On May 
30, Indonesia's largest lender, state-owned Bank Mandiri, 
reported a 1.8 percent decline in its after tax profit in Q1 
2006, partly due to high interest costs.  On May 30, 
Indonesia's third largest state-owned bank, Bank Rakyat 
Indonesia (BRI), announced a plan to write-off loans to 
earthquake victims in Yogyakarta.  This report uses an 
exchange rate of Rp 9,220 per 1 USD.  End Summary. 
 
Inflation Rises Slightly in May 
------------------------------- 
 
¶2. On May 31, BPS announced that the Consumer Price Index 
(CPI) rose 15.6 percent YoY, and 0.4 percent MoM in May 
¶2006.  Higher clothing prices, surprisingly, were a main 
driver of the increase.  Core inflation also increased 
slightly to 9.5 percent (YoY) from 9.4 percent in the 
previous month. 
 
--------------------------------------------- 
Table 1: Inflation Components - May 2006 
--------------------------------------------- 
Component                          MoM    YoY 
--------------------------------------------- 
Foodstuffs                         0.3   16.5 
Prepared food, beverages, 
Tobacco                            0.3   12.8 
Housing, water, electric, fuel     0.3   12.8 
Clothing                           2.0   10.3 
Health                             0.6    7.3 
Education, recreation/sports       0.1    8.0 
Transportation, communication 
and financial services             0.2   30.9 
--------------------------------------------- 
Total                              0.4   15.6 
--------------------------------------------- 
Source: Central Bureau of Statistics (BPS) 
 
Q1 GDP Growth Slows and Unemployment Rises 
------------------------------------------ 
 
¶3. On May 15, BPS announced that GDP growth in the first 
quarter of 2006 slowed to 4.6 percent YoY, the weakest 
quarterly YoY growth rate in almost two years.  In 
comparison, real GDP grew 4.9 percent in Q4 2005. 
Government expenditures did not rise as much as expected, 
increasing only by 14.1 percent YoY after expanding 29.8 
percent Q4 2005.  Coordinating Minister for the Economy 
Boediono admitted that the GOI had failed to accelerate 
spending in the first four months of the year due to 
regional and central government bureaucratic delays.  A 
Ministry of Finance budget realization data for Q1 2006 
showed the GOI had only spent about Rp 3.5 trillion (USD 380 
million) of a budgeted Rp 62.9 trillion (USD 6.8 billion) in 
capital expenditures during the first quarter, and about Rp 
4.2 trillion (USD 455.5 million) of a budgeted Rp 36.9 
trillion (USD 4 billion) in social spending.  Realized 
 
JAKARTA 00007340  002 OF 005 
 
 
transfers to regions were much closer to their budgeted 
levels at Rp 49.3 trillion (USD 5.3 billion), or 22.4 
percent of the full year Rp 220.1 trillion (USD 23.9 
billion) target. 
 
¶4. Private consumption growth also slowed to 3.2 percent, 
compared with 4.2 percent in the previous quarter, with 
analysts citing high consumer interest rates and higher fuel 
prices as the culprits.  Retail sales in the auto sector, 
for example, plunged by nearly 45 percent year-on year to 
below 80,000 units in the first quarter.  "People are still 
feeling the impact of the fuel price increase last year, and 
high interest rates have prevented a pickup in economic 
growth", said Bank Danamon President Director Sebastian 
Paredes.  Exports, however, rose a robust 10.8 percent YoY 
in Q1 2006 versus 7.4 percent in Q4 2005.  Investment growth 
increased slightly to 2.9 percent on a YoY basis, boosted by 
strong inflows of foreign direct investment (FDI). 
 
¶5.  On June 1, BPS also reported that the Indonesian 
workforce reached 106.3 million in February 2006, an 
increase of 500,000 YoY.  The unemployment rate as of 
February 2006 was 10.4, slightly higher than the February 
2005 level of 10.3 percent.  Only about 40-50 percent of 
Indonesia's workforce is in the formal sector. 
 
Table 2: Indonesian YoY Real GDP Growth: 
--------------------------------------- 
¶A.  By Production Category 
 
Production Category      Pct Change (YoY)   Share 
                          Q1-06     Q4-05   of GDP 
                           vs         vs 
                          Q1-05     Q4-04 
--------------------------------------------- -------- 
Manufacturing               2.0     2.9      28.7 
Agriculture                 3.9     5.5      13.4 
Retail, Hotel, Rest.        4.2     6.0      15.0 
Mining                      7.0     1.9      10.5 
Services                    5.4     6.0       9.8 
Finance and Leasing         5.1     5.2       8.3 
Construction                7.2     6.9       6.4 
Transp. and Communication  11.0    10.8       7.0 
Electricity, Gas, Water     5.2     6.1       0.9 
--------------------------------------------- ------- 
Total (categories weighted) 4.6     4.9    100.0 
 
¶B.  By Expenditure Category 
 
Expenditure Category     Pct Change (YoY)    Share 
                          Q1-06     Q4-05    of GDP 
                           vs         vs 
                          Q1-05     Q4-04 
--------------------------------------------- -------- 
 
Household Consumption      3.2      4.2       58.9 
Government Expenditure    14.2     30.0        6.9 
Investment                 2.9      1.8       21.6 
Exports                   10.8      7.4       42.8 
Imports                    5.1      3.7       34.8 
 
Source:  Central Bureau of Statistics (BPS) 
 
Bank Indonesia Cuts Interest Rate to 12.5 Percent 
--------------------------------------------- ---- 
 
¶6. BI cut its benchmark interest rate on May 9 to 12.5 
percent, after holding rates steady at 12.75 percent since 
December 6, 2005.  At its June 6 board meeting, BI 
maintained the interest rate at that level.  In a June 6 
statement, BI Governor Burhanuddin Abdullah noted 
significant outflows of foreign capital in May created some 
pressure on the rupiah and pass-through inflation, but said 
inflation numbers and banking indicators are still 
manageable. 
 
Stock Market and Rupiah Volatility 
---------------------------------- 
 
JAKARTA 00007340  003 OF 005 
 
 
 
¶7. In line with stock markets in other emerging markets, the 
Jakarta Stock Exchange (JSX) Composite Index underwent a 
major correction in the second half of May, shedding more 
than USD 10 billion in market value.  The sell-off continued 
through June 8, with the JSX composite index closing at 
1241.3, a decrease of 15.2 percent since May 15.  The 
President Director of the JSX said on May 23 that unlike 
some exchanges, JSX does not have authority to temporarily 
suspend trading in case of excess volatility, but must 
request permission from the Capital Markets Supervisory 
Authority (BAPEPAM).  The JSX composite index had risen more 
than 14 percent from January 1 to May 15, 2006. 
 
¶8. After strong appreciation in the first quarter, the 
rupiah also came under pressure in the second half of May 
when volatility struck many emerging markets.  The rupiah 
hit a four-month low of Rp 9,420/USD on May 16, recovered to 
Rp 9,220/USD by the end of May, but again came under 
pressure in early June, closing at Rp 9,395/USD on June 8. 
BI Governor Burhanuddin Adbullah told the media he saw "no 
fundamental reasons" behind the rupiah's depreciation, and 
said BI would "continue to guard the rupiah and to be in the 
market," according to Dow Jones Newswires. 
 
Moody's Upgrades Sovereign Ratings for Indonesia 
--------------------------------------------- --- 
 
¶9. On May 19, Moody's Investor Service upgraded Indonesia's 
foreign currency country ceiling for bonds and the foreign- 
and domestic-currency government bond ratings to "B1" from 
"B2", citing improved fiscal health (Moody's B1 rating is 
four notches below investment grade.)  Moody's also upgraded 
the foreign currency country ceiling for bank deposits to 
"B2" from "B3", while the local currency bank deposit 
ceiling and the local currency guideline remained unchanged 
at "Baa2".  Moody's said further upgrades would depend on 
the maintenance of sound government finances, improvements 
in the investment climate, and increased foreign direct 
investment.  Standard and Poor's Ratings Services rates 
Indonesia's sovereign credit four notches below investment 
grade, while Fitch rates Indonesia's sovereign debt three 
notches below investment grade. 
 
Bank Rating Upgrades 
-------------------- 
 
¶10.  Also on May 19, Moody's announced it had raised the 
ratings of the constrained foreign currency debts and 
deposits of nine Indonesian banks.  The revised ratings 
carry a "stable" outlook.  According to Moody's, the 
increase in the subordinated debt ratings of state-owned 
banks reflects the government's enhanced ability to support 
the banking system given its increased resources.  Non-prime 
short-term deposit and bank financial strength ratings of 
all the nine banks were unaffected.  On May 23 Fitch also 
upgraded national ratings for eight Indonesian banks and 
support ratings for two banks, Buana and NISP. 
 
------------------------------------------- 
Table 3: Indonesian Bank Ratings Upgrades 
------------------------------------------- 
Bank/Rating         Agency   Previous    Upgrade 
-------------------------------------------- 
Mandiri 
Subordinated debt  Moody's   B2/B3         B1/B1 
Long-term deposit  Moody's   B3            B2 
National long-term Fitch     A             AA 
 
BNI 
Subordinated debt  Moody's   B2/B3         B1/B1 
Long-term deposit  Moody's   B3            B2 
National long-term Fitch     BBB+          A+ 
 
BCA 
National long-term Fitch     A-            AA 
 
BRI 
 
JAKARTA 00007340  004 OF 005 
 
 
Subordinated debt  Moody's   B3            B1 
Long-term deposit  Moody's   B3            B2 
National long-term Fitch     A+            AA+ 
 
BTN 
Long-term deposit  Moody's   B3            B2 
 
Danamon 
Subordinated debt  Moody's   B2            B1 
National long-term Fitch     A-            AA- 
 
BII 
Subordinated debt  Moody's   B2            B1 
Long-term deposit  Moody's   B3            B2 
National long-term Fitch     BBB+          AA- 
 
Niaga 
Subordinated debt  Moody's   B2            B1 
Long-term deposit  Moody's   B3            B2 
 
Permata 
Long-term deposit  Moody's   B3            B2 
 
Panin 
Long-term deposit  Moody's   B3            B2 
 
NISP 
National long-term Fitch     A-            AA+ 
Support            Fitch     4             3 
 
Buana 
National long-term Fitch     A-            AA+ 
Support            Fitch     4             3 
 
Source: XFN-Asia, Fitch Ratings 
 
Bank Mandiri Q1 Loss, New Directors 
----------------------------------- 
 
¶11. On May 30, Indonesia's largest state-owned bank, Bank 
Mandiri, reported a 1.8 percent decline in first-quarter 
after-tax profit to Rp 510 billion (USD 55.3 million).  The 
bank's profits declined partly due to high interest costs. 
Total assets of the bank rose 2.2 percent YoY to Rp 254.9 
trillion (USD 27.6 billion), while total loans expanded 5.6 
percent to Rp 105.1 trillion (USD 11.4 billion).  Mandiri's 
net non-performing loan ratio (NPL) fell to 15.8 percent in 
the first quarter from 16 percent at the end of December, 
while its gross NPLs increased to 27.7 percent from 26 
percent.  The bank said it aims to reduce its net NPL ratio 
to 5 percent by the end of 2007.  Shareholders also approved 
distribution of 50 percent dividend, or Rp 302 billion (USD 
32.8 million) of 2005 net profit 
 
¶12. On May 23, Mandiri shareholders ratified the appointment 
of five new directors and the removal of Finance Director 
J.B. Kendarto.  The shareholders also approved the 
appointment of President Commissioner Edwin Gerungan to the 
additional role of Independent Commissioner.  Mandiri's 
Board of Directors now has eleven members, while the Board 
of Commissioners has seven.  Mandiri President Director Agus 
Martowardojo said that the expansion was needed to improve 
performance. 
 
Indonesia Says It Will Repay IMF Early 
-------------------------------------- 
 
¶13. 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) in two tranches, one each 
in 2006 and 2007.  Yudhoyono emphasized that early repayment 
to IMF is important to increase the GOI's credibility and 
improve market confidence.  While many analysts believe 
Indonesia can easily afford the repayment -- FX reserves 
were USD 44.2 billion as of May 29 -- some have questioned 
the timing given the recent bout of emerging market 
volatility.  The GOI did not immediately announce a schedule 
 
JAKARTA 00007340  005 OF 005 
 
 
for the repayments, but said the first could come as early 
as June. 
 
BRI Writes Off Loans for Earthquake Victims 
------------------------------------------- 
 
¶14. Indonesia's third largest bank, the state-owned Bank 
Rakyat Indonesia (BRI) announced on May 30 that it would 
write-off Rp 140 billion (USD 15.2 million) in loans for its 
earthquake affected customers in Yogyakarta.  BRI's total 
loans to the region are Rp 339 billion (USD 36.8 million), 
or 0.95 percent of total loans nationwide.  "With the write- 
off, potential loss from interest payment is Rp 30 billion 
(USD 3.3 million)," BRI's President Director Sofyan Basir 
told the press.  BRI budgeted RP 265 billion (USD 28.7 
million) for disaster write-offs in 2006. 
 
--------------------------------------------- ------ 
Table 4:  Selected Economic, Financial, and Trade 
Statistics, February - May 2006 
--------------------------------------------- ------ 
                          Feb     Mar     Apr    May 
 
CPI inflation (YoY)      17.92   15.74   15.4   15.60 
 
CPI inflation (MoM)       0.58    0.03    0.05   0.37 
 
Rp/USD Exch. rate(1)     9,185   9,075   8,775  9,220 
 
30-day SBI rate (1)      12.74   12.73   12.75  12.50 
 
Foreign Res. (USD bn)(1) 35.5    40.1    42.8   44.2 
 
JSX Composite Index(1)   1230.7  1323.0  1464.4 1330.0 
 
Exports (USD billion)    7.35     7.45    7.6 
 
Percent change (YoY)    15.18     2.76   11.9 
 
Imports (USD billion)    4.51     4.35    4.8 
 
Percent change (YoY)     4.47   -12.65   -3.7 
 
Trade Balance            2.84    3.10     2.8 
 
Source: Bank Indonesia, BPS, JSX 
(1) End of period 
 
PASCOE