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INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
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RUEHBY/AMEMBASSY CANBERRA 9824
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UNCLAS SECTION 01 OF 06 JAKARTA 010053 
 
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 August 2 a slowing year-on-year (YoY) inflation 
in July 2006 of 15.15 percent.  Bank Indonesia (BI) lowered 
interest rates on August 8 by 50 basis points (bps) to 11.75 
percent.  On July 26 Standard & Poor's Rating Services 
raised Indonesia's long-term currency rating citing 
improving fiscal performance.  On July 12, the Ministry of 
Finance presented the Government of Indonesia's mid-year 
revision of the 2006 Budget to Parliament.  The revised 
budget assumes a higher oil price of USD 62 per barrel and 
lower economic growth of 5.9 percent.  On July 17, the 
Ministry of Finance launched Indonesia's first three-year 
"retail" bonds to individuals, which pay interest monthly 
and offer a 12.05 percent fixed coupon rate.  The Government 
of Indonesia (GOI) earned USD 617 million from a monthly 
bond offering on July 12.  On July 25, the GOI swapped USD 
265 million bonds maturing in 2007-09 as part of its bond re- 
profiling program. 
 
¶2. Summary - Continued: On July 5, the GOI and Bank 
Indonesia (BI) launched a financial sector reform policy 
package.  On July 10, Finance Minister Sri Mulyani Indrawati 
announced, as part of the package, a new regulation allowing 
state-owned banks the same flexibility enjoyed by private 
banks in addressing their non-performing loans.  On July 25, 
Director General for Treasury Mulia Nasution announced the 
closing of 300 government accounts with individual officials 
as account holders.  On July 24, Bank Indonesia signed a 
Memorandum of Understanding (MOU) with Malaysia's Central 
Bank, on improving human resources especially in the Islamic 
financial sector.  Several major banks reported their 
performance in the first half of 2006; loans in the "loss" 
category increased.  An exchange rate of 9,070 per USD is 
used throughout this report.  End Summary. 
 
Inflation Slowing: 
BI Cuts Interest Rate to 11.75 Percent 
-------------------------------------- 
 
¶3. On August 2, the Central Bureau of Statistics (BPS) 
announced that inflation is slowing down.  July inflation 
was 15.15 percent year-on-year (YoY), and 0.45 percent month- 
on-month (MoM).  Core inflation went up by 0.36 percent MoM, 
and 9.58 percent YoY.  In a widely expected move, Bank 
Indonesia (BI) on August 8 cut its benchmark interest rate 
by 50 bps to 11.75 percent.  Coordinating Minister for 
Economic Affairs Boediono reportedly stated, "I think BI has 
moved in the right direction and that there is still room 
for more cuts.  For our part, we will follow up by 
continuing to improve the investment climate, as high 
interest costs are not the only factors impeding growth." 
Minister for Industry Fahmi Idris reportedly stated on 
August 9, "It's positive, but still far from what the 
business community and the real sector have been hoping 
for." 
 
----------------------------------------- 
Table 1: Inflation Components - June 2006 
--------------------------------------------- 
Component                          MoM    YoY 
--------------------------------------------- 
Foodstuffs                       0.99   15.77 
Prepared food, beverages, 
tobacco                          0.31   11.58 
Housing, water, electric, fuel   0.21   12.72 
Clothing                         0.36    9.56 
Health                           0.06    7.00 
Education, recreation/sports     0.69    7.73 
Transportation, communication 
and financial services           0.08   30.80 
--------------------------------------------- 
Total                            0.45   15.15 
--------------------------------------------- 
Source: Central Bureau of Statistics (BPS) 
 
S&P Upgrades Indonesia's Currency Rating 
---------------------------------------- 
 
 
JAKARTA 00010053  002 OF 006 
 
 
¶4. On July 26 Standard & Poor's Rating Services announced 
that it had raised Indonesia's long-term foreign currency 
rating from B+ to BB-.  This is the highest rating for 
Indonesia since the 1998 financial crisis and at the same 
level as the Philippines, Turkey, Ukraine and Serbia.  Some 
analysts noted the upgrade was not expected until the fourth 
quarter.  The upgrade may give a stimulus to economic 
growth.  "While implementation remains a challenge, an 
encouraging development has been the speed at which 
difficult, but much-needed, reforms are happening, 
especially since the new economic team was put in place in 
December 2005," said S&P's credit analyst Sani Hamid. The 
upgrade puts S&P's rating on a par with Fitch Ratings but 
one notch above Moody's Investors Service. 
 
¶5. Government debt may fall to less than 50 percent of gross 
domestic product (GDP) this year from more than 100 percent 
in 2000, S&P said in its statement.  However, the external 
debt remains high and a burden, and proved unmanageable in 
the past.  Lack of transparency in the finances of public 
sector-related entities, and in coordinating policies 
between the fiscal and monetary authorities; also remain 
issues that need to be resolved. S&P estimates cleaning-up 
cost associated with removing nonperforming loans from state- 
owned banks to reach 3 percent of GDP.  Infrastructure 
shortfalls hampered competitiveness and economic growth is 
below potential.  Analysts, however, expects external 
liquidity to strengthen through a combination of current 
surplus and improved investment flows.  Hamid noted, "A 
faster implementation of reforms on taxes, labor, 
infrastructure development, and the legal structure, coupled 
with improved public sector transparency, would favorably 
influence the rating outlook on Indonesia."  Conversely, 
Indonesia's ratings may come under pressure should 
government delay reforms or reverse current fiscal policies. 
 
GOI Submits 2006 Budget Revision to Parliament 
--------------------------------------------- - 
 
¶6. On July 12, the Minister of Finance (MOF) presented to 
Parliament's Budget Committee, mid-year revisions to the 
2006 budget.  In anticipation of higher government spending 
to help spur growth, the GOI increased this year's budget 
deficit estimate to 1.3 percent of GDP from 0.7 percent. 
The MOF also revised the oil price assumption upward to USD 
62/barrel from USD 57.  Observers see this as the GOI's 
attempt to avoid last year's mistakes.  In 2005, the GOI 
stood by a low oil price assumption in a rising global fuel 
price environment, leading to concerns about the swelling 
fuel subsidy and fiscal sustainability.  The revisions for 
2006 include a stronger exchange rate of Rp 9,300/USD 
instead of 9,900, and a higher benchmark interest rate of 12 
percent up from 9.5 percent.  Despite double digit YoY 
inflation in the first half of the year, the inflation 
estimate remained unchanged at 8 percent. 
 
Table 2: Revised Macro Assumptions for 2006 Budget 
--------------------------------------------- ----- 
Assumptions           2005   2006     2006 
                                (Proposed Revision) 
--------------------------------------------- ------ 
 
Real GDP growth (1)    6.0    6.2     5.9 
CPI inflation          8.6    8.0     8.0 
USD/IDR (avg)          9,800  9,900   9,300 
3-month SBI rate (avg) 8.4    9.5     12.0 
Budget deficit (2)     0.9    0.7     1.2 
Average oil price (3)  54     57      62 
Oil production (4)     1,075  1,050   1,000 
 
(1) In percent 
(2) As percentage of GDP 
(3) In USD per barrel 
(4) In million barrels per day 
 
Source: Ministry of Finance 
 
¶7.  Bank Indonesia Governor Burhanuddin Abdullah said the 
 
JAKARTA 00010053  003 OF 006 
 
 
revised growth assumption of 5.9 percent was more realistic, 
given that growth in the first half of the year would 
probably be in the 4.6-to-5.1 percent range.  The GOI also 
anticipates higher government spending to reach Rp 689.5 
trillion (USD 76 billion), or 22.1 percent of GDP, from the 
previous forecast of Rp 647.7 trillion (USD 71 billion) or 
21.3 percent of GDP.  The budget targeted higher tax, oil 
and gas revenues.  The GOI expects this year's deficit to 
rise to reach Rp 37.6 trillion (USD 42 billion).  Most of 
the spending will go to domestic sovereign debt, fuel and 
electricity subsidies, education sector and social welfare. 
The increased deficit will require the GOI to raise more 
money from net bond sales, Rp 35.8 trillion (USD 4 billion) 
compared to Rp 24.8 trillion (USD 2.7 billion) under the 
original budget. 
 
GOI Launches "Retail" Bonds 
--------------------------- 
 
¶8. On July 17 the government launched Indonesia's first-ever 
"retail" bond sold directly to individual customers without 
an auction process.  The new three-year bonds pay interest 
monthly and offer a 12.05 percent fixed coupon.  Individuals 
can place a minimum order of Rp 5 million (USD 551) with 
designated sales agents.  Previous bond purchases required a 
Rp 1 billion (USD 110,000) minimum, making them beyond the 
reach of most individual investors.  Minister of Finance Sri 
Mulyani Indrawati said the new bonds will encourage the 
development of an "investment society" in Indonesia, helping 
finance the country's development needs by expanding capital 
markets.  The right to initially purchase the bonds is 
limited to Indonesian citizens, although non-nationals can 
buy them in the secondary market.  "All the proceeds of the 
bond sales will go into the state budget," Mulyani said. 
She is positive about the market's appetite for the retail 
bonds, pointing out the main attractions of higher yields 
compared to bank deposits, and potential capital gains. 
President Director of state-owned Bank Mandiri Agus 
Martowardojo said that the retail bond sale was timely given 
the current bullish bond market and that the coupon rate was 
attractive. However, he said that the government needed to 
clarify its policies on taxation and funding sources to 
eliminate investor doubt.  Mandiri is one of the 11 
designated sales agents for the bonds.  On August 7, the GOI 
earned Rp 3.3 trillion (USD 364 million) from the retail- 
bond sale, which will form part of the total Rp 35.8 
trillion (USD 4 billion) in expected net proceeds from 
government bond sales this year. 
 
GOI Sells 7-Year Bonds; 
GOI Swaps Soon Maturing Bonds 
----------------------------- 
 
¶9. On July 12, the Ministry of Finance earned Rp 5.6 
trillion (USD 617 million) in proceeds from bond sales.   Rp 
4.3 trillion (USD 474 million) of the bonds will mature in 
March 2013 at a weighted average yield of 12.21 percent, and 
another Rp 1.3 trillion (USD 143 million) bonds will mature 
in June 2021 at a 12.41 percent yield.  The Director for 
Bond Management Rahmat Waluyanto said that the bullish 
market gave the government the upperhand during the auction, 
with only lower-yield bids being accepted. "I think these 
lower yields will be positive for the future development of 
our bond market," he said.  Higher yields mean higher 
interest costs for the government.  The government is 
bearing yields of nearly 13 percent for the same seven-year 
and 15-year bonds it first issued in January, and for the 
eight-year and 20-year bonds it sold during June's bond 
sale. 
 
¶10. On July 25, the MOF swapped Rp 2.4 trillion (USD 265 
million) of bonds maturing in 2007-09 for bonds maturing in 
¶2021.  The old bonds had yields of 9.5 - 14 percent, while 
the new bonds offer yields of 12.8 percent yield.  On August 
8, the MoF earned another Rp 4.4 trillion (USD 485 million) 
from a similar debt exchange within the same maturity and 
yield range.  Those debt swaps are the latest in a series of 
MOF operations designed to reduce the amount of bonds coming 
 
JAKARTA 00010053  004 OF 006 
 
 
due in 2007-09. 
 
GOI and BI Launches Financial Sector 
Reform Policy Package 
------------------------------------ 
 
¶11. On July 5, the GOI and Bank Indonesia launched a policy 
package aimed at strengthening the banking industry, non- 
bank institutions and capital markets to boost the economy. 
The financial sector policy package contains 13 policies, 33 
programs and 59 actions plans.  (Note: This is the third of 
three policy packages announced by Coordinating Minister for 
Economic Affairs Boediono.  The first two were for 
infrastructure and investment.)  Minister Boediono stated, 
"The government realizes that development of the Indonesian 
financial sector to world class standards will be a dynamic 
process requiring successive stages.  Accordingly follow-up 
financial sector policy packages will be developed in 2007 
and beyond."  Among the measures will be revisions to 
existing regulations on bank debt write-offs which may allow 
state banks further scope to restructure non-performing 
loans (NPLs). 
 
¶12.  According to the timeline in the package, Bank 
Indonesia will issue regulations providing incentives for 
merger and acquisitions in the banking sector by October. 
The GOI also plans to draw up a bill by December to 
strengthen coordination between fiscal and monetary 
authorities.  For non-bank financial institutions, there are 
steps to strengthen their capital structures, and to handle 
insolvent institutions and introduce good governance 
principles.  A team led by Boediono and Sri Mulyani will 
oversee these measures, to be completed this year and into 
¶2007. 
 
New Rules to Help NPL Problems 
------------------------------ 
 
¶13. On July 10, the MOF announced as part of the financial 
sector reform package, a revision to Government Regulation 
No. 14/2005 and Finance Minister Decree No. 31/2005 
regarding the procedures for non-performing loans (NPLs). 
The government hopes to complete the amendments by August, a 
month later than originally scheduled.  The new regulations 
would allow the same flexibility for state-owned banks as 
for private banks in resolving NPLs.  The upcoming 
regulation will allow state-owned banks to apply various 
debt restructuring options without having to first seek the 
approval of the Finance Ministry.  "Our purpose is to 
provide a strong legal foundation for the handling of non- 
performing loans.  All NPLs should be resolved by the state 
banks themselves," Mulyani said.  In addition, the Ministry 
of State-Owned Enterprises will require state banks to sign 
a management contract to improve risk management to reduce 
NPLs.  The President must approve the final draft in 
consultation with the Cabinet. 
 
¶14. Partly due to high interest rates, the banking system's 
NPL ratio rose to 9.3 percent at the end of February 2006 
compared to 8.3 percent at the end of December 2005.  State- 
owned banks contributed the largest portion.  State-owned 
banks have long called on the government to revise the 
regulations.  They claim they have been restricted in 
restructuring their NPLs, due to an inability to provide 
debt reductions and other common restructuring options 
available to private banks. 
 
GOI Closes Accounts 
------------------- 
 
¶15.  On July 25, the Ministry of Finance Director General 
for Treasury Mulia Nasution announced that the GOI had 
closed 300 accounts held in the name of individual 
government officials (current and retired).  This is a 
response to findings of Supreme Audit Board (BPK) revealing 
that 957 government accounts with individual government 
officials names as account holders, amounting to Rp 20.5 
trillion (USD 2.3 billion).  The BPK submitted its 
 
JAKARTA 00010053  005 OF 006 
 
 
"Performance Report of Central Government in 2004" to 
Parliament on September 2005.  "There might be more accounts 
to close, and we are still reviewing them," Nasution said. 
 
BI Signs MOU With Malaysia on Islamic Finance 
--------------------------------------------- 
 
¶16. On July 24, BI Governor Burhanuddin Abdullah, as the 
Head of the Board of the Indonesian Banking Development 
Agency (LPPI), and Malaysia's central bank governor Zeti 
Akhtar Aziz, as Head of Supervisory Board for International 
Center for Education in Islamic Finance (INCEIF), signed a 
Memorandum of Understanding (MOU) on improving human 
resources in the Islamic financial sector.  Indonesia's 
President Susilo Bambang Yudhoyono and Malaysia's Prime 
Abdullah Ahmad Badawi witnessed the signing. 
 
Banks Report First Half Performance 
----------------------------------- 
 
¶17. Several banks announced their performance for the first 
half of 2006 in July.  Indonesia's largest state-owned Bank 
Mandiri reported on July 26 its net profit rose 32.4 
percent, reaching Rp 4.9 trillion (USD 540 million), helped 
by a 6.5 percent higher net interest margin (NIM) over the 
previous year.  Mandiri posted a net profit of Rp 815.44 
billion (USD 90 million) in the January-June period compared 
to Rp 616 billion (USD 68 million) in the same period last 
year.  With a market capitalization of USD 3.6 billion, 
Mandiri's second-quarter net profit alone stood at Rp 305 
billion rupiah (USD 34 million), three times the year-ago 
period's figure.  Mandiri, with its large volume of NPLs, 
was among the hardest hit banks last year due to higher 
rates and stricter central bank regulations on bad loans 
classification.  Its net NPL ratio fell to 24.9 percent in 
the first half of 2006 compared with 26.2 percent as of June 
30, 2005.  Its "loss" category loans however, increased from 
Rp 12 trillion (USD 1.3 billion) to Rp 19 trillion (USD 2.1 
billion) in the period. 
 
¶18. On July 31, the second largest state-owned Bank Negara 
Indonesia (BNI) reported a 9 percent decrease in first-half 
net profit, partly due to lower loan demand and higher 
operating costs.  BNI's net interest income rose only 1 
percent year-on-year to Rp 3.7 trillion (USD 408 million), 
while operating expenses increased by 24 percent to Rp 2.8 
trillion (USD 309 million).  BNI's President Director Sigit 
Pramono commented, "With the still-high BI rate in the first 
half of the year, the real sector could not borrow 
significantly enough to stimulate the economy.  Loan demand 
declined."  The bank's NPL ratio increased to 11.23 percent 
from 7.82 percent previously.  Loans to the corporate sector 
accounted for 51 percent of the total NPLs.  The bank 
disclosed that the electricity sector dominated its top ten 
defaulters, with loans worth of Rp 3.5 trillion (USD 386 
million).  BNI will offer a discount to defaulters with 
debts under Rp 5 billion (USD 0.5 million) if they pay in 
full within three months.  The discounts would decrease with 
every delay of three months. 
 
¶19. Amid the high domestic interest rate, Indonesia's fifth- 
largest Bank Danamon and sixth-largest Bank Internasional 
Indonesia (BII), both affiliated with Singapore's Temasek 
Holdings, reported a significant drop in profit for first 
half of 2006.  Danamon booked Rp 558 billion net profit (USD 
61.5 million), a drop by 57 percent from Rp 1.3 trillion 
(USD 143 million) in the same period last year.  BII 
recorded an 11 percent fall in net profit to Rp 352 billion 
(USD 39 million).  Danamon reported a 16 percent growth in 
net interest margin (NIM), but had to write-off Rp 533 
billion (USD 59 million) of assets while operating expenses 
increased significantly.  BII also reported a growing NIM, 
but had to write-off Rp 196 billion (USD 22 million) of 
assets.  Both banks reported a significant increase in loss 
category (grade 5 out of 5) and special mention loans (grade 
2).  Danamon's loans classified as "loss" reached Rp 733 
billion (USD 81 million), doubled from Rp 331 billion (USD 
36 million) from the previous year, while BII's increased to 
 
JAKARTA 00010053  006 OF 006 
 
 
Rp 487 billion (USD 54 million) from Rp 322 billion (USD 36 
million). 
 
¶20. Bank Niaga, the seventh largest lender, booked a net 
profit of Rp 353.5 billion (USD 39 million) in the first six 
months this year, up nearly 15 percent from the same period 
last year.  Its net interest income rose 29 percent to Rp 
1.1 trillion (USD 121 million) from a year earlier on 
lending growth of 19 percent to Rp 30.65 trillion (USD 3.4 
billion).  Niaga's net NPL ratio improved slightly to 4.11 
percent from 4.44 percent last year. 
 
Rabobank Acquires Two Domestic Banks 
------------------------------------ 
 
¶21. Netherlands-based Rabobank announced on July 13 it had 
signed an agreement to buy two unlisted Indonesian banks, 
Bank Haga and Bank Hagakita, from individual shareholders. 
The two Indonesian banks, which primarily focus on small-to- 
medium enterprises (SMEs) in trading, manufacturing and 
business services sectors, have a combined 1,537 employees 
and a network of 78 branches in Java, Bali and southern 
Sumatra.  The two banks have total assets of Rp 3.97 
trillion (USD 438 million) as of December 2005.  "Bank Haga 
and Bank Hagakita have an impressive track record of 
consistent growth since their founding 17 years ago.  This 
is an exciting platform for Rabobank to grow our business in 
Indonesia," Fergus Murphy, head of Asia region for Rabobank 
International said.  The press release said the acquisitions 
are consistent with Rabobank's strategy of being the world's 
leading financier in the food and agribusiness sectors.  It 
did not provide the size of the acquisition or its value. 
Rabobank, the world's 14th largest bank in terms of Tier I 
capital, has an Indonesian subsidiary, Bank Rabobank 
International Indonesia, which has been in business for 16 
years and focuses primarily on corporate clients 
 
--------------------------------------------- ------ 
Table 3:  Selected Economic, Financial, and Trade 
Statistics, April - July 2006 
--------------------------------------------- ------ 
                          Apr   May    Jun   Jul 
 
CPI inflation (YoY)      15.4  15.60  15.53  15.15 
 
CPI inflation (MoM)       0.05  0.37   0.45   0.45 
 
Rp/USD Exch. rate(1)     8,775 9,220  9,300  9,070 
 
30-day SBI rate (1)      12.75 12.50  12.50  12.25 
 
Foreign Res. (USD bn)(1) 42.8  44.2   40.1    41.1 
 
JSX Composite Index(1)   1,464 1,330  1,310  1,352 
 
Exports (USD billion)     7.6   8.3    8.5 
 
Percent change (YoY)     11.9  13.4   15.1 
 
Imports (USD billion)     4.8   5.1    5.7 
 
Percent change (YoY)     -3.7  -2.1    1.3 
 
Trade Balance             2.8   3.2    2.8 
 
Source: Bank Indonesia, BPS, JSX 
(1) End of period 
 
PASCOE