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UNCLAS SECTION 01 OF 05 JAKARTA 013420 
 
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 FOR FINEMAN 
DEPARTMENT PASS EXIM BANK 
 
E.O. 12598: N/A 
TAGS: EFIN EINV ECON PGOV ID
SUBJECT: INDONESIA - ECONOMIC AND FINANCIAL HIGHLIGHTS 
OCTOBER-NOVEMBER 2006 
 
¶1. Summary.  The Central Bureau of Statistics (BPS) 
announced on November 16 that Indonesia's GDP growth reached 
5.5% in the third quarter of 2006 on a year-on-year (YoY) 
basis, the highest quarterly growth rate since the third 
quarter of 2005.  YoY consumer price inflation (CPI) dropped 
significantly to 6.3% in October and 5.3% in November as the 
BPS's inflation calculations incorporated the effects of the 
October 2005 fuel price hikes.  Bank Indonesia (BI) cut its 
policy rate by 50 basis points on November 7, bringing the 
BI rate to 10.25%.  On November 16, the Government of 
Indonesia (GOI) sold its remaining shares in Bank 
Internasional Indonesia (BII) and Lippo Bank for Rp 514 
billion (US$ 56 million).  As part of a restructuring of the 
Ministry of Finance, on November 1 Minister of Finance Sri 
Mulyani Indrawati swore in ten new senior officials, 
including a new Secretary General and five new Directors 
General.  On November 29, Parliament confirmed Muliaman D. 
Hadad and Budi Rochadi as BI Deputy Governors, replacing 
Maman H. Soemantri and Maulana Ibrahim.  On October 5, BI 
issued a new policy package designed to promote 
consolidation in the banking industry.  The GOI repaid the 
remainder of Indonesia's SDR 2.1 million (US$ 3.2 billion) 
outstanding loans to the IMF on October 12.  On October 10, 
the Ministry of Finance (MOF) auctioned Rp 1 trillion (US$ 
109 million) in 2-year treasury bonds with a coupon rate of 
9.25%, and on October 17, the MOF swapped bonds totaling Rp 
4.3 trillion (USD 469 million) as part of its bond re- 
profiling program.  Indonesia and China agreed on an 
expanded, US$ 4 billion debt swap program under the Chiang 
Mai Initiative on October 17.  Fitch Ratings affirmed on 
November 1 the ratings of Bank Central Asia (BCA), Bank 
Rakyat Indonesia (BRI) and Bank Niaga, Indonesia's second, 
fourth, and seventh largest banks respectively.  Bank 
Permata and Lippo Bank issued subordinated debt in November 
2006 totaling US$ 255 million.  End Summary. 
 
GDP Growth Accelerates While Inflation Slows 
-------------------------------------------- 
 
¶2. On November 16, BPS announced that Indonesia's economy 
expanded by 5.5% YoY in the third quarter, the highest 
growth rate since the third quarter of 2005. Strong growth 
in exports drove the expansion in GDP, with exports of goods 
and services rising 12.1% YoY during the quarter.  On 
November 1, BPS announced that Indonesia's headline CPI 
inflation had dropped to 6.3% in October 2006 from 14.5% in 
September as the agency's CPI calculations incorporated the 
effects of the October 2005 fuel price hikes.  YoY inflation 
in November fell further to 5.3%.  Month-on-month (MoM) 
inflation in November fell to 0.3% from 0.9% MoM in October, 
as price increases linked to the Idul Fitri holiday in late 
October moderated.  Transportation and communication prices 
rose in October and November by only 1.7% and 1.0% YoY, 
respectively, compared with the 30.2% YoY rise recorded in 
September.  Pressure on prices also eased for a number of 
other segments.  Housing costs lost momentum, increasing by 
the slowest rate in more than six and a half years at 4.4% 
YoY in November.  Growth in food prices eased to 8% YoY in 
November, down from 15.5% YoY and 10.0% YoY in September and 
October, respectively.  Core inflation also slowed to 5.9% 
YoY in November, down from 6.9% and 9.2% YoY in the previous 
two months. 
 
--------------------------------------------- - 
Table 1: Consumer Price Inflation Components 
         October - November 2006 
--------------------------------------------- - 
Component              October      November 
                      MoM    YoY   MoM    YoY 
--------------------------------------------- - 
Foodstuffs           2.2    10.0   0.7    8.1 
Prepared food, 
beverages, tobacco   0.7     7.5   0.5    5.9 
Housing, water, 
electric, fuel       0.3     4.8   0.3    4.4 
Clothing             1.0     7.2   0.7    7.6 
Health               0.3     5.6   0.4    5.4 
Education, 
 
JAKARTA 00013420  002 OF 005 
 
 
recreation/sports    0.1     8.3   0.0    8.0 
Transportation, 
communication and 
financial services   0.5     1.7  -0.2    1.0 
--------------------------------------------- - 
Total                0.9     6.3   0.3    5.3 
--------------------------------------------- - 
Core Inflation (1)   0.7     6.9   0.3    5.9 
--------------------------------------------- - 
 
(1) Core inflation excludes items that exhibit volatile 
price movements, including energy and food products. 
 
Source: Central Bureau of Statistics (BPS) 
 
BI Cuts Reference Interest Rate to 10.25% 
----------------------------------------- 
 
¶3. For the sixth time since May 2006, BI cut its policy rate 
50 basis points to 10.25% at its November 7 monetary policy 
meeting.  The move followed a 50 basis point cut on October 
¶5.  Following the November 7 rate cute, Finance Minister Sri 
Mulyani commented that "with the sharp slow down in 
inflation, BI has room to cut rates without worrying about 
reigniting price increases."  However, in its statement 
released after the meeting, BI cited "economic concerns 
calling for vigilance in the months ahead" including 
continued inflationary pressure in 2007.  BI added that "the 
Board of Governors...sees the need for more measured, 
cautious operation of monetary policy to maintain 
macroeconomic stability in the medium and long-term and 
consolidate the momentum for sustainable economic recovery." 
Most analysts expect BI to continue to reduce interest rates 
through the end of 2006, although there is less agreement on 
the pace of likely future interest rate cuts. 
 
GOI Divests its Ownership of Two Banks 
-------------------------------------- 
 
¶4. On November 16, the GOI, through its Asset Management 
Company (PPA), earned Rp 514 billion (US$ 56 million) from 
the divestment of a 5.22% stake in BII and a 0.0012% stake 
in Lippo Bank.  With the sales, the GOI has divested its 
remaining stakes in all but two banks, Maybank (6.08%) and 
BTPN (28.39%). 
 
MOF Replaces Senior Officials 
----------------------------- 
 
¶5. On November 1, Minister of Finance Sri Mulyani Indrawati 
swore in ten new senior or "echelon one" officials at the 
Ministry.  As part of the move, the Minister formally 
expanded the number of Directors General (DGs) at the 
Ministry from ffive to sven, creating new DGs for ebtt 
Management and Stte Assets.  The new structure is designed 
to strngthen the Ministry's debt management and budgeteexecution functions.  Table 2 lists the names and i(tles of 
the new officials. 
 
--------------------------------------------- ----- 
Table 2: Ministr  of Finance--New Senior Officials 
---------------(----------------------------- ----- 
                    Previous        Current 
                    Position        Position 
--------------------------------------------- ----- 
Mulia P.         Dircctor General  Secretary 
 Nasution        (DG) for State    General 
                 Treasury 
Rachmad          DG for Budget     DG for 
 Rocjadi         and Balanced      Budgetary 
                 Funds             Affairs 
Herry            Director for      DG for State 
 Purnomo         State Assets      Treasury 
Hadiyanto        Head of Legal     DG for State 
                 Bureau            Assets 
Mardiasmo        Special Advisor   DG for 
                 on Government     Balanced 
                 Spending          Funds 
 
JAKARTA 00013420  003 OF 005 
 
 
Rahmat           Director for      DG for Debt 
 Waluyanto       Debt Management   Management 
Permana Agung    Special Advisor   Inspector 
 Daradjatun      on State Assets   General 
Eddie            Former DG of      Special Advisor 
 Abdurrachman    Customs and       on International 
                 Excise            Affairs 
Agus Muhammad    Inspector General Special Advisor 
                                   on State Assets 
Marwanto         Head of Public    Special Advisor 
                 Affairs Bureau    on Government 
                                   Spending 
Anggito          Head of Fiscal    Acting Head of 
Abimanyu         Policy Agency     Fiscal Policy 
                                   Agency 
 
Source: Ministry of Finance 
 
Parliament Appoints New BI Deputy Governors 
------------------------------------------- 
 
¶6. On November 27, Parliament confirmed the appointments of 
BI career officials Muliaman D. Hadad and S. Budi Rochadi as 
BI Deputy Governors.  Hadad is currently BI's Director for 
Banking Regulation and Research, and will replace departing 
Deputy Governor Maman H. Soemantri.  Rochadi, BI's current 
Director for Banking Supervision, will replace outgoing 
Deputy Governor Maulana Ibrahim.  The appointments become 
effective January 1,2007. 
 
BI Issues New Policy Package 
---------------------------- 
 
¶7. On October 5, BI launched a new banking policy package 
that includes incentives to promote bank consolidation and 
rules limiting any given individual or organization to a 
single banking presence in Indonesia.  The new rules provide 
a host of incentives for banks to merge, including granting 
consolidated banks looser lending limits, lower minimum 
capital requirements, and relaxed rules for obtaining 
licenses to conduct foreign exchange operations.  The policy 
package also sets out new definitions for related parties, 
redefines the scope of lending limits for related parties, 
and further clarifies the definition of parties considered 
"group debtors" by virtue of their financial ties. 
 
¶8. Under the new single presence rules, a single party can 
own controlling interest in only one banking organization. 
BI defines controlling interest as owning 25% or more of 
total outstanding shares, or having direct or indirect 
controlling power.  Owners currently in violation of the 
single presence policy will have to submit a restructuring 
plan to BI by December 2007, and report quarterly on 
divestiture progress starting in January 2008.  The rules 
mandate that violators comply with the new regulations by 
December 2010, but do not specify penalties for non- 
compliance. 
 
¶9. As part of the package, BI also issued a new regulation 
increasing the number of economic sectors considered "vital 
to national economic development" for the purpose of bank 
lending guidelines.  Under BI regulation 7/3/2005, BI 
encourages banks to lend an amount equivalent to 30% of 
their capital to projects by state-owned enterprises in the 
food, simple housing, oil and gas (and other energy 
sources), water, electricity, and transportation 
infrastructure, including roads, bridges, railways, and 
aGQ+Qllion (US$ 3.2 billion) loan balance under its 
International Monetary Fund (IMF) Extended Fund Facility 
(EFF), four years ahead of schedule.  "This loan settlement 
is a signal of the increased flexibility of the Government's 
 
JAKARTA 00013420  004 OF 005 
 
 
fiscal position," BI Governor Burhanuddin Abdullah stated. 
A positive market response to Indonesia's first accelerated 
IMF loans repayment in June 2006, as well as support by 
Parliament, prompted the Government to finish paying off its 
IMF debt.  Despite the large repayment, Indonesia's foreign 
exchange position remains strong.  Analysts estimate that 
the country's foreign exchange reserves will remain in the 
US$ 39-40 billion range through the end of 2006, a figure 
equivalent to over four months imports and short-term 
foreign debt repayments.  "We expect this settlement to 
improve investor confidence, decrease country risk and 
ultimately increase Indonesia's credit rating," added 
Abdullah. 
 
Government Debt Market Update 
----------------------------- 
 
¶11. The MOF sold Rp 1 trillion (US$ 109 million) in 2-year 
treasury bonds at its October 10 auction with a coupon rate 
of 9.25%.  Director of Treasury Bond Management Rachmat 
Waluyanto said the auction would be the last for 2006 since 
the MOF has already reached its 2006 financing target of Rp 
60.9 trillion (US$ 6.6 billion).  The projected net proceeds 
(new issuances minus amortizations) from 2006 bond sales 
total Rp 35.8 trillion (US$ 3.9 billion). 
 
¶12. On October 17, MOF swapped bonds maturing in 2007-2009 
totaling Rp 4.3 trillion (US$ 469 million) for 15-year debt 
priced to yield 11.03%.  On November 21, MOF earned Rp 0.9 
trillion (US$ 98 million) from a similar swap of 8-year 
bonds with a coupon rate of 11%.  The debt swaps are the 
latest in a series of MOF operations designed to smooth out 
the GOI's amortization profile by reducing the amount of 
bonds maturing in 2007-09. 
 
Indonesia and China Agree On Debt Swap 
-------------------------------------- 
 
¶13. On October 17, BI and the People' Bank of China signed 
an "Amendment Agreement" to their Bilateral Swap Arrangement 
under the Chiang Mai Initiative, raising the limit for short- 
term bilateral currency swaps from US$ 2 billion to US$ 4 
billion.  The new agreement will enable Indonesia to receive 
up to US$ 4 billion in short-term financing from China 
through a swap mechanism if Indonesia faces short-term 
liquidity constraints. 
 
Fitch Affirms Ratings for Three Banks 
------------------------------------- 
 
¶14. On November 1, Fitch Ratings affirmed the ratings of 
Indonesia's second largest bank, Bank Central Asia (BCA), 
fourth largest bank, Bank Rakyat Indonesia (BRI) and seventh 
largest bank, Bank Niaga.  According to the rating agency's 
website, BCA's ratings reflect its strong financial 
position, including generally good asset quality and above 
average capitalization, along with its steady earnings 
profile.  BRI's ratings reflect its strong underlying 
profitability and above average asset quality, which stem 
from its largely unchallenged franchise in rural micro 
credit.  Bank Niaga's ratings reflect its reasonably strong 
profitability, an improved capital position, and parentage 
in Malaysia's Bumiputra-Commerce Holdings Berhad, the 
combination of which mitigate a still high level of impaired 
loans. 
 
--------------------------------------------- ------ 
Table 3: Fitch Ratings for BCA, BRI, and Niaga 
--------------------------------------------- ------ 
                              BCA      BRI    Niaga 
--------------------------------------------- ------ 
Long-term foreign currency    BB       BB-    BB- 
Short-term foreign currency   B        B 
National long-term            AA       AA+ 
Individual                    C/D      C/D    D 
Support                       4        4      4 
 
Source: www.fitchratings.com 
 
JAKARTA 00013420  005 OF 005 
 
 
 
Permata and Lippo Issue Sub-Debt 
------------------------------- 
 
¶15. Indonesia's eighth largest commercial bank, Bank 
Permata, issued subordinated bonds totaling Rp 500 billion 
(US$ 55 million) on November 14.  The bonds hold a tenor of 
five years, with the interest rate of 150-225 basis points 
above the five years bonds of the government' FR22. FR22 
will be matured in 2012, with the interest rate of 12%.  The 
bank announced it would use the proceeds from the issue to 
finance business expansion, increase its sources of long- 
term funds and strengthen its capital base.  On November 16, 
Indonesia's ninth largest bank, Lippo Bank, issued US$ 200 
million in subordinated debt carrying a coupon rate of 
7.375%. 
 
--------------------------------------------- ------ 
Table 4:  Selected Economic, Financial, and Trade 
Statistics, August - November 2006 
--------------------------------------------- ------ 
                          Aug    Sep    Oct    Nov 
 
CPI inflation (YoY)      14.90  14.55   6.29   5.27 
 
CPI inflation (MoM)       0.33   0.38   0.86   0.34 
 
IDR/USD Exch. rate(1)    9,100  9,235  9,107  9,140 
 
30-day SBI rate (1)      11.75  11.25  10.75  10.25 
 
Foreign Res. (US$ bn)(1) 42.0   42.3   39.9 
 
JSX Composite Index(1)   1,431  1,534  1,583  1,719 
 
Exports (US$ billion)     8.9    8.8     8.7 
 
Percent change (YoY)     17.1   16.7    16.4 
 
Imports (US$ billion)     5.6    5.7     4.5 
 
Percent change (YoY)      2.6   4.0      3.1 
 
Trade Balance             3.3   3.1      4.2 
 
Source: Bank Indonesia, BPS, JSX 
(1) End of period 
 
PASCOE