VZCZCXRO3406
RR RUEHCHI RUEHDT RUEHHM
DE RUEHJA #0255/01 0310915
ZNR UUUUU ZZH
R 310915Z JAN 07
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 3048
RUEATRS/DEPT OF TREASURY WASHINGTON DC
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUEHKO/AMEMBASSY TOKYO 0192
RUEHBJ/AMEMBASSY BEIJING 3806
RUEHBY/AMEMBASSY CANBERRA 0361
RUEHUL/AMEMBASSY SEOUL 3853
RUEAIIA/CIA WASHDC

UNCLAS SECTION 01 OF 03 JAKARTA 000255 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
AIDAC 
 
USAID FOR AA/ANE 
DEPT FOR EAP/IET AND EB/IFD/OMA 
TREASURY FOR IA-SETH SEARLS 
DEPARTMENT PASS FEDERAL RESERVE SAN FRANCISCO FOR FINEMAN 
 
E.O. 12598: N/A 
TAGS: EINV EAID EFIN PGOV ID
SUBJECT: YUDHOYONO CANS THE CGI 
 
REF: 2006 JAKARTA 7013 - Indonesia Repays IMF Early 
 
¶1. (SBU) Summary.  In a surprise announcement, President Yudhoyono 
told the media on January 24 that Indonesia would end the 
Consultative Group on Indonesia (CGI) donor forum.  While many 
observers believed the CGI format had outlived its usefulness, the 
timing and abruptness of the announcement -- two hours after a 
meeting with visiting IMF Chief Rodrigo de Rato -- surprised donors. 
 Neither did GOI officials do a good job explaining the financial 
implications of ending the CGI--at first, GOI economic officials 
said the Government would seek to issue more bonds while it 
curtailed loans from donors, only to assure donors in the days 
following that Indonesia was grateful for donor assistance in past 
years and would need continued support.  Deputy Minister at the 
Coordinating Minister for the Economy, Mahendra Siregar, told us the 
GOI is having internal discussions on a new format for dialog to 
possibly include a GOI-led high-level multilateral policy meeting, 
and in-depth technical discussions on a program or sectoral basis. 
We suggested the GOI consider developing forums to discuss poverty, 
investment climate, governance, decentralization, judicial reform, 
disaster mitigation and infrastructure.  End Summary. 
 
Good-bye CGI 
------------ 
 
¶2. (SBU) President Yudhoyono told the media on January 24, 
"Indonesia no longer needs the CGI.  I deem it necessary to end the 
format which we know as the CGI forum in this year of 2007.  I 
declare that there is no longer a need for the existence of the CGI 
forum as before."  Although the GOI's ambivalence towards the CGI 
process had been the subject of discussions for months among donors, 
the surprise announcement came two hours after a press conference 
with visiting IMF Managing Director Rodrigo de Rato.  (Note: The IMF 
Jakarta office told us de Rato had not discussed the CGI with 
Yudhoyono.)  The CGI had been meeting in its current format since 
1992, with a large annual multilateral "pledging" meeting and 
smaller working groups on specific issues such as investment climate 
led by a few donors.  That the large CGI forum had begun to outlive 
its usefulness was well-known, but the timing and the abruptness of 
the announcement took donors by surprise.  The World Bank was quick 
to respond with as statement supporting the President with the 
comment, "We welcome President Yudhoyono's announcement...that 
Indonesia would no longer rely on the CGI framework for determining 
its development financing...The old CGI model is no longer 
relevant..." 
 
No Immediate Impact on GOI Budget Financing 
------------------------------------------- 
 
¶3. (SBU) The elimination of the CGI Forum will have little immediate 
impact on the GOI's budget financing.  The "pledging" aspects of the 
forum had become largely a formality, with donor decisions 
pre-determined before the meeting, in keeping with each donor's 
budget and legislative process.  In 2006 the CGI pledged $5.4 
billion in loans and grants for budget support and development 
programs.  The GOI spent weeks preparing for the annual CGI meeting, 
and then was forced to sit through often tedious statements from 
dozens of donors, many of which had only small programs in Indonesia 
but relished their yearly moment in the spotlight.  Finance Minister 
Sri Mulyani Indrawati was quoted by the media as stating that the 
annual CGI event was a "costly and ceremonial" wrapping-up 
ceremony. 
 
¶4. (SBU) The MOF's DG for Debt Management Rahmat Waluyanto was also 
quoted by the media as saying, "We will gradually reduce our 
dependence on foreign debt, and replace it with rupiah-denominated 
bonds financing."  He added that foreign debt tends to carry a 
"political agenda," is inflexible, and is vulnerable to exchange 
rate risks.  However, the GOI has sounded a much more cautious note 
in private.  Deputy Minister for the Economic Cooperation and 
International Financing at the Coordinating Ministry for Economic 
Affairs, Mahendra Siregar, told us on January 29 that Indonesia is 
very grateful to donors for the assistance over the years and seeks 
continued support.  The CGI format has served its purpose, however, 
and it is time for a "different mechanism for dialog," Siregar said. 
 
 
¶5. (SBU) Siregar noted the GOI has no immediate plans to change its 
 
JAKARTA 00000255  002 OF 003 
 
 
current debt structure and was not signaling any intention to 
replace foreign loans with bonds.  He said the GOI was well aware of 
the spread between bond interest rates and concessional loans.  Many 
of Indonesia's bilateral and multilateral loans are at concessional 
rates between 3-5%, as compared to average interest rate on domestic 
bonds of 11-12%.  The Government of Indonesia has $67 billion in 
foreign debt (about 22% of GDP), which it hopes to reduce to 13% of 
GDP by 2009 (See Table 1). 
 
---------------------------------------- 
Table 1: Indonesia's Debt (December 2006) 
---------------------------------------- 
Bilateral        42% 
----------------------------- 
Japan           $ 25  billion 
France          $ 1.6 billion 
USA             $ 1.6 billion 
Germany         $ 1.3 billion 
 
Multilateral     27% 
------------------------------ 
World Bank      $ 8.5 billion 
ADB             $ 8.4 billion 
 
Other 
------------------------------ 
Global Bonds      7% 
Others (mostly 
export credits)  22% 
 
Source: Ministry of Finance, Bank Indonesia 
 
Source: Ministry of Finance 
 
Dialog in What Form? 
-------------------- 
 
¶6. (SBU) Siregar told us that the GOI was still having internal 
discussions on a new format for donor consultations.  He suggested 
that the financing gap discussions be separate from the development 
dialog.  For the latter, he recommended three possible scenarios: a 
high-level policy dialog, to which Ambassadors would be invited; 
annual meetings with key donors covering a range of economic issues, 
including assistance; and more technical, program or sectoral 
discussions.  One suggestion by the ADB and the World Bank is that 
Indonesia adopt a structure more like the Philippines, with a large 
multilateral development forum annually, followed by technical 
meetings on an "as needed" basis.  We suggested that the most useful 
areas for in-depth sectoral discussions would be investment climate, 
poverty, governance, decentralization, judicial reform, disaster 
mitigation and infrastructure.  Some new GOI-led format may now take 
the place of the CGI "working groups," some of which have been very 
successful in coordinating donor programs and supporting GOI 
initiatives. 
 
IMF Visit: Good Behind the Scenes 
--------------------------------- 
 
¶7. (SBU) IMF Chief de Rato visited Indonesia on January 24 during a 
three-nation tour and had several high-level meetings with Cabinet 
officials and President Yudhoyono.  It was the first meeting of an 
IMF Chief with the Indonesian President since former President 
Soeharto signed a controversial IMF rescue package during the 
1997-98 financial crisis.  The media photo of then IMF chief 
Camdessus standing with folded arms (viewed as a rude and imperious 
gesture in Javanese  culture) behind a seated Soeharto as he signed 
the agreement, triggered outrage among many Indonesians.  Indonesia 
repaid its $7.8 billion standby reserve loan to the IMF in 2006, 
three years ahead of schedule (ref A) clearing all its outstanding 
IMF debt.  The IMF has welcomed the move in public statements. 
 
¶8. (SBU) Despite the tough media coverage, the IMF Senior 
Representative in Jakarta told us the de Rato visit went well behind 
the scenes, with good discussions between de Rato and key Cabinet 
officials.  President Yudhoyono was "engaged and well-briefed."  De 
Rato also participated in a roundtable discussion with academic 
economists, Parliament and business leaders.  GOI officials 
discussed the "image problem" of the IMF in Indonesia.  Since 
 
JAKARTA 00000255  003 OF 003 
 
 
Indonesia has repaid all its IMF loans, its status is now one of a 
member "no longer using Fund resources," with no formal post-program 
monitoring.  The IMF continues to have advisors at the Central Bank 
and Directorate General for Tax, and maintains surveillance of the 
economy and regular discussions.  De Rato himself was unaware of the 
CGI announcement within hours of his meeting with the President, and 
when asked responded, "What's the CGI?" 
 
¶9. (SBU) Comment: Political considerations clearly drove the 
decision to end the CGI.  Given the IMF's public unpopularity here, 
it is hard for the GOI to be linked to the IMF in any way, despite 
(or perhaps partially due to) Finance Minister Mulyani's former job 
as the Executive Director for Southeast Asia.  So with de Rato 
coming to town, the GOI seems to have concluded that it needed to 
take some policy decision that would sit well with its economic 
nationalist critics, even if the IMF was only marginally involved in 
the CGI.  Foreign debt is nearly as unpopular as the IMF--Parliament 
in particular feels the GOI carries too much foreign debt and often 
hauls the Finance Minister in for lengthy sessions to question her 
on the issue.  Mulyani was also quoted in the media as saying that 
the move is a "politically important symbol which will increase our 
bargaining power with creditors, prevent the politicizing of issues, 
and keep everything confined to technical issues."  Nonetheless, the 
GOI continues to be fully cooperative with donors: Siregar's hastily 
called meetings with major donors in the days following the 
announcement shows the GOI knows the importance of keeping the door 
open and maintaining dialog. 
 
PASCOE