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RR RUEHCHI RUEHDT RUEHHM
DE RUEHJA #8686/01 1921040
ZNR UUUUU ZZH
R 111040Z JUL 06
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 7071
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UNCLAS SECTION 01 OF 06 JAKARTA 008686 
 
SIPDIS 
 
SIPDIS 
 
DEPT FOR EAP/MTS AND EB/IFD/OMA 
TREASURY FOR IA-SETH SEARLS 
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 JUNE 
2006 
 
 
¶1. Summary.  The Central Bureau of Statistics (BPS) 
announced on July 3 a slight decrease in year-on-year (YoY) 
inflation in June 2006 to 15.5 percent.  Citing improving 
macroeconomic trends, Bank Indonesia (BI) cut interest rates 
by 25 basis points to 12.25 percent on July 6.  At their 
June 14 meeting, Consultative Group on Indonesia (CGI) 
members pledged USD 5.4 billion of loans and grants to the 
Government of Indonesia (GOI), more than covering the 
country's USD 4.3 - 4.6 billion financing gap for 2006.   On 
June 22, Parliament's Special Budget Committee and Minister 
of Finance Sri Mulyani Indrawati agreed on a revised set of 
macroeconomic budget assumptions for 2006.  On June 22, the 
GOI announced it would repay half of its outstanding standby 
reserves loan to the International Monetary Fund (IMF), 
about USD 3.7 billion, and BI transferred the funds to the 
IMF the next week.  Largely as a result, June foreign 
exchange reserves at BI fell to USD 40.1 billion.  On June 
2, the Minister of Finance issued a decree on infrastructure 
risk sharing guidelines for public-private partnership 
projects, and the President signed a revised decree on land 
procurement on June 5.  Both measures are designed to help 
facilitate infrastructure investment.  A June 2006 Ministry 
of Finance report shows that government spending has been 
slow, with only 31 percent of 2006 funds distributed as of 
June 7.  On June 14 Bank Mandiri, Indonesia's largest state- 
owned bank, disclosed the names of debtors with non- 
performing loans (NPLs) exceeding Rp 1 trillion (USD 107.5 
million) which account for 60 percent of the bank's total 
NPLs.  The mutual fund industry is recovering from last 
year's steep sell-off by offering a new class of lower risk 
products.  End Summary. 
 
Inflation Remains High, BI Cuts Interest Rate 
--------------------------------------------- 
 
¶2. On July 3, the Central Bureau of Statistics (BPS) 
announced a slight decrease in YoY inflation in June 2006 to 
15.5 percent.  Month-on-month (MoM) inflation rose slightly 
to 0.5 percent from 0.4 percent in May, mainly due to a rise 
in food prices.  Core inflation also increased slightly to 
9.6 percent YoY from 9.5 percent in May.  Citing improving 
macroeconomic trends, including declining inflation rates, 
BI cut short-term interest rates by 25 basis points (bps) to 
12.25 percent on June 6, a move widely expected by analysts. 
BI Governor Burhanuddin Abdullah said there remains room for 
further interest rate cuts.  "We will cut more aggressively 
in future when there is less pressure from inflation." 
Abdullah said he hopes BI can lower benchmark interest rate 
to 11 or 10 percent by the end of the year, if inflation 
falls into the single digits. 
 
--------------------------------------------- 
Table 1: Inflation Components - June 2006 
--------------------------------------------- 
Component                          MoM    YoY 
--------------------------------------------- 
Foodstuffs                         1.1   17.0 
Prepared food, beverages, 
tobacco                            0.3   11.7 
Housing, water, electric, fuel     0.3   12.8 
Clothing                          -0.1    9.8 
Health                             0.3    7.3 
Education, recreation/sports       0.2    8.0 
Transportation, communication 
and financial services             0.1   30.8 
--------------------------------------------- 
Total                              0.5   15.5 
--------------------------------------------- 
Source: Central Bureau of Statistics (BPS) 
 
CGI Pledges USD 5.4 Billion for Indonesia, 
------------------------------------------ 
 
¶3. During their June 14 meeting, CGI members pledged USD 5.4 
billion in loans and grants to Indonesia, a sum that will 
more than cover Indonesia's USD 4.3 - 4.6 billion financing 
gap for 2006.  The commitment consists of USD 3.9 billion in 
on-budget loans and USD 1.5 billion off-budget loans and 
 
JAKARTA 00008686  002 OF 006 
 
 
grants.  Donors also pledged to help Indonesia rebuild after 
the magnitude 6.3 earthquake that struck the Yogyakarta area 
on May 27 and caused an estimated Rp 29 trillion (USD 3.1 
billion) in damages and loss.  Coordinating Minister for 
Economic Affairs Boediono said the GOI understands that the 
CGI's 29 donor organizations would have to consult with 
capitals and parliaments before finalizing grant commitments 
for the quake-hit areas.  The GOI is planning to provide USD 
1.2 billion in earthquake relief and reconstruction from its 
budget and is requesting USD 300 million from donors. 
 
GOI Revises 2006 Budget Assumptions 
----------------------------------- 
 
¶4.  On June 22, Parliament's Special Budget Committee and 
Minister of Finance Sri Mulyani Indrawati agreed on a 
revised set of macroeconomic budget assumptions for 2006. 
The budget assumptions influence the projected levels of 
various revenue and expenditure items in the budget. 
Parliament and the GOI have also agreed on a set of budget 
assumptions for the draft 2007 budget that President 
Yudhoyono will present to Parliament in August 2006.  Table 
2 outlines revised FY 2006 and preliminary FY 2007 budget 
assumptions. 
 
--------------------------------------------- ------ 
Table 2: 2006 Revised and 2007 Preliminary 
         Budget Assumptions 
--------------------------------------------- ------ 
                        2006     2006       2007 
                     Original  Revised  Preliminary 
--------------------------------------------- ------ 
Budget deficit (1)     0.7    1.3-1.5    0.7-0.9 
 
Oil Price (USD/Barrel)  57       62        57-65 
 
BI Interest Rate (pct)  9.5      12       8.5-9.5 
 
Exchange Rate (Rp/USD) 9,900    9,300  9,000-9,500 
 
Inflation (pct)         8.0      8.0      6.0-8.0 
 
GDP Growth (pct)        6.2      5.9      6.0-6.5 
 
(1) Percent of GDP. 
 
Source: Ministry of Finance 
 
GOI Repays Half of IMF Standby Reserves Loan 
-------------------------------------------- 
 
¶5.  On June 22, the GOI informed the International Monetary 
Fund (IMF) of its decision to advance repayment of 
approximately half of its standby reserves loan under 
Indonesia's Extended Fund Facility, or USD 3.7 billion.  BI 
made the USD 3.7 billion transfer to the IMF the following 
week, accounting for most of the USD 4.6 billion decline in 
Indonesia's gross FX reserves in June.  At the end of the 
month, reserves stood at USD 40.1 billion, down from USD 
44.7 billion at the end of May.  On June 15, Japan Bank for 
International Cooperation (JBIC) agreed to waive its 
condition that a USD 78 million loan from JBIC, due in 2010, 
be linked to simultaneous repayment of the IMF. 
 
Bank Indonesia Launches Credit Information Bureau 
--------------------------------------------- ---- 
 
¶6. On June 29, BI officially launched its new credit 
information bureau to assist banks in lending and risk 
management.  The bureau collects information on borrowers 
that financial institutions can access electronically, 
including borrowers' names, ID numbers, amount borrowed, 
collateral, and other details.  The bureau is operating 
under BI's directorate for licensing and information.  To 
date, BI has stated that more than 2,600 financial 
institutions have submitted information on 16.3 million 
borrowers.  BI expects this number to increase significantly 
in the wake of its June 29 directive requiring all domestic 
 
JAKARTA 00008686  003 OF 006 
 
 
banks (including small rural banks), finance companies and 
credit card issuers to submit borrower information to the 
credit information bureau.  Participation by international 
banks and non-bank financial institutions is voluntary.  The 
lack of accurate borrower information has held back lending 
for many Indonesian banks.  Except through informal negative 
lists, they were largely unable review a customer's complete 
credit profile to make informed lending decisions. 
 
Infrastructure Decrees Issued 
----------------------------- 
 
¶7. On June 2, Finance Minister Sri Mulyani issued a new 
ministerial decree (PMK 38/2006) on an "Infrastructure Risk 
Allocation Framework".  The decree covers risk sharing for 
Public Private Partnership (PPP) infrastructure projects in 
the energy, transportation, telecommunications, water 
resources, and housing sectors.  The decree covers the 
following types of risk: 
 
-- Political risk: policies, actions, or decisions by 
government or state entities that directly and significantly 
impose financial losses on a business enterprise through 
expropriation, legal or regulatory change, currency 
convertability restrictions or funds repatriation 
prohibitions. 
 
-- Project Performance Risk: Risk associated with project 
implementation, which includes location risk and operational 
risk. 
 
-- Demand Risk: When demand for goods or services produced 
are lower than agreed. 
 
¶8. Mulyani also said that the government would propose an 
approximately Rp 2.6 trillion (USD 279.6 million) budget 
line item in the revised 2006 budget to finance a three- 
pronged GOI risk-sharing package potentially including the 
following items: 
 
--An infrastructure insurance provision, under which the GOI 
would provide Rp 1 - 2 trillion (USD 107.5 - 215.1 million) 
to cover the potential liabilities from GOI project risk 
sharing. 
 
--A possible revolving land acquisition fund.  Because of 
delays in finalizing this fund, the GOI has reallocated to 
other needs Rp 600 billion (USD 64.5 million) that had been 
intended for this program. 
 
--A possible government-financed "infrastructure investment 
fund" still under internal debate.  The GOI has said this 
fund should be finalized soon. 
 
¶9. On June 5, President Susilo Bambang Yudhoyono signed 
Presidential Decree No. 65/2006 on Land Procurement for 
Public Development Purposes.  This decree, which revises 
Presidential Decree No. 36/2005 on the same topic, reduces 
the GOI's authority to confiscate private property if the 
owner disagrees with the GOI's compensation offer.  The 
revision also narrows the scope of infrastructure projects 
that may be categorized as meeting a "public purpose." 
Decree 36/2005 was criticized for allegedly allowing several 
instances of forced evictions, intimidation and even 
physical threats to small property owners.  Table 3 outlines 
changes in the types of projects that the GOI may categorize 
as meeting a "public purpose." 
 
--------------------------------------------- --- 
Table 3: Decree No. 36/2005: Types of Infrastructure 
Projects that may be defined as meeting a 
"Public Purpose" 
--------------------------------------------- --- 
Type                 Revised Decree 
--------------------------------------------- --- 
Railway              Retained 
 
Public Safety        Retained 
 
JAKARTA 00008686  004 OF 006 
 
 
 
Airport              Retained 
 
Highway/Toll Road    Retained 
 
Seaport              Retained 
 
Telecommunication 
Facilities           Removed 
 
Public Building      Removed 
 
Hospitals            Removed 
 
Schools              Removed 
 
Source: Media reports 
 
GOI Spending Slow in First Half of 2006 
--------------------------------------- 
 
¶10.  On June 28, Ministry of Finance (MOF) issued a budget 
realization report showing that actual GOI spending up to 
June 7, 2006 was Rp 203.1 trillion (USD 21.8 billion), or 
31.4 percent of the targeted amount.  The central government 
spent Rp 113.6 trillion (USD 12.2 billion) or 25.6 percent 
of the targeted Rp 427.6 trillion (USD 46 billion).  Local 
government spending reached Rp 89.6 trillion (USD 9.6 
billion) or 40.1 percent of the targeted Rp 220.1 trillion 
(USD 23.7 billion).  MOF Director General for the Treasury 
Mulia Nasution said spending would significantly increase by 
the third quarter as central and local government spending 
units tender and contract projects.  Nasution also noted 
that limited project planning capacity in many local 
governments is holding back spending. 
 
¶11. Up to June 7, GOI revenues reached Rp 209.1 trillion 
(USD 22.5 billion), or 33.4 percent of the full year target. 
Tax revenues make up the largest component of total revenues 
at Rp 161.5 trillion (USD 17.4 billion) or 38.8 percent of 
the targeted Rp 416.3 trillion (USD 44.8 billion).  Non-tax 
revenue reached Rp 47 trillion (USD 5 billion) or 22.9 
percent of the targeted Rp 205.3 trillion (USD 22.1 
billion).  Budget surplus reached Rp 5.9 trillion (USD 634.4 
million). 
 
GOI Swaps Debt 
-------------- 
 
¶12. On June 27, the MOF swapped Rp 3.1 trillion (USD 333.3 
million) of bonds maturing in 2007-09 for bonds maturing in 
¶2012.  The old bonds had yields of 12.1 - 12.6 percent, 
while the new bonds offer yields of 13.2 percent yield.  The 
debt swap is the latest in a series of MOF operations 
designed to reduce the very amortizations in 2007-09. 
 
Bank Indonesia Delays "Single Presence Policy" 
--------------------------------------------- 
 
¶13. On June 5, BI Governor Burhanuddin Abdullah announced 
that BI had decided to postpone the implementation of a 
"single presence policy" from 2006 to 2008 or later.  The 
policy would prevent a person or a company from owning 
shares in more than one Indonesian bank.  Once BI implements 
the policy, foreign investors in Indonesian banks, including 
companies such as Singapore's Temasek Holdings, United 
Overseas Bank (UOB), Oversea-Chinese Banking Corporation 
(OCBC), Malaysia's Khazanah, and the United Kingdom's 
Standard Chartered, would likely have to merge, restructure, 
or divest their banks.  Abdullah reportedly stated that BI 
is considering other options in consultation with affected 
banks before creating a stricter regulation requiring 
divestment. 
 
Bank Mandiri "Name and Shame" 
---------------------------- 
 
¶14. On June 14, Indonesia's largest state-owned Bank Mandiri 
 
JAKARTA 00008686  005 OF 006 
 
 
publicized the names of 30 corporate borrowers with non- 
performing loans exceeding Rp 1 trillion (USD 107.5 
million).  The bad debtors account for 60 percent of 
Mandiri's NPLs, which reached Rp 27 trillion (USD 2.9 
billion) as of December 2005, or 26.2 percent of its total 
loans.  The surge in NPLs contributed to an 88-percent drop 
in the bank's net profit in 2005.  Among the bad debtors is 
the Bosowa Group, controlled by Aksa Mahmud, a brother-in- 
law of Vice President M. Jusuf Kalla.  Mandiri President 
Director Agus Martowardojo said the bank would provide 
assistance, such as softer repayment terms, for debtors 
demonstrating goodwill to repay.  "For those who do not, the 
bank plans to take action," Martowardojo said. 
 
Mutual Funds Recover? 
--------------------- 
 
¶15.  Funds invested in Indonesia's mostly fixed-income 
mutual funds industry dropped from a peak of Rp 110.8 
trillion (USD 11.8 billion) in February 2005 to only Rp 29 
trillion (USD 3.1 billion) in December 2005, a decrease of 
73 percent.  However, Capital Markets Supervisory Agency 
(BAPEPAM) data show that investment in low-risk, "protected" 
mutual funds has increased significantly in 2006, driving a 
recovery in the sector.  From March-May 2006, investments in 
new "protected" mutual funds increased by 110 percent to Rp 
6.3 trillion (USD 677 million) from Rp 3 trillion (USD 323 
million) in January 2006.  In the "protected" funds, 
investment managers protect the face or nominal value of 
investors' funds by investing them in a zero-coupon bond 
equivalent product (i.e. a low risk government bond) priced 
at a discount.  The managers then invest leftover funds in 
higher-risk assets, and return any profits to the investors. 
The "protected" funds appeal to many investors who seek 
lower risk products after suffering losses in the 2005 
mutual fund sell-off. 
 
--------------------------------------------- -- 
Table 4: Mutual Fund Growth (Dec 05 - May 06) 
(in Rp trillion) 
--------------------------------------------- -- 
Type         2005  2006 
             Dec   Jan   Feb   Mar   Apr   May 
--------------------------------------------- -- 
Fixed income 13.9  14.4  14.2  14.5  14.6  14.6 
Money market  2.1   2.0   2.0   2.3   2.4   2.3 
Mixed         5.5   4.8   4.7   4.6   4.8   4.7 
Equity        4.9   4.3   4.2   3.9   4.2   4.4 
"Protected"   3.0   3.1   2.0   3.7   3.8   6.3 
TOTAL        29.4  28.6  27.1  29.0  29.8  32.3 
 
Source: Capital Markets Supervisory Agency (BAPEPAM) 
 
--------------------------------------------- ------ 
Table 5:  Selected Economic, Financial, and Trade 
Statistics, March - June 2006 
--------------------------------------------- ------ 
                          Mar    Apr   May   Jun 
 
CPI inflation (YoY)      15.74  15.4  15.60  15.53 
 
CPI inflation (MoM)       0.03   0.05  0.37   0.45 
 
Rp/USD Exch. rate(1)     9,075  8,775 9,220  9,300 
 
30-day SBI rate (1)      12.73  12.75 12.50  12.50 
 
Foreign Res. (USD bn)(1) 40.1   42.8  44.2   40.1 
 
JSX Composite Index(1)   1,323  1,464 1,330 1,310 
 
Exports (USD billion)     7.45   7.6   8.3 
 
Percent change (YoY)      2.76  11.9  13.4 
 
Imports (USD billion)     4.35   4.8   5.1 
 
Percent change (YoY)    -12.65  -3.7  -2.1 
 
JAKARTA 00008686  006 OF 006 
 
 
 
Trade Balance             3.10    2.8     3.2 
 
Source: Bank Indonesia, BPS, JSX 
(1) End of period 
 
PASCOE