VZCZCXRO2768
RR RUEHCHI RUEHDT RUEHHM
DE RUEHJA #0063/01 0090839
ZNR UUUUU ZZH
R 090839Z JAN 07
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 2729
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHKO/AMEMBASSY TOKYO 0178
RUEHBJ/AMEMBASSY BEIJING 3779
RUEHBY/AMEMBASSY CANBERRA 0301
RUEHUL/AMEMBASSY SEOUL 3848
RUEAIIA/CIA WASHDC

UNCLAS SECTION 01 OF 04 JAKARTA 000063 
 
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 DECEMBER 
2006 
 
 
¶1. Summary.  The Central Bureau of Statistics (BPS) announced on 
January 2, 2007 that December inflation rose to 1.21% month-on-month 
(MoM), mainly due to higher rice prices.  On January 4, Bank 
Indonesia (BI) cut its benchmark interest rate by 25 basis points 
(bps) to 9.5%, a signal that the bank is likely reducing the rate of 
monetary policy loosening after five consecutive months of 50-bps 
cuts.  On December 5 the Ministry of Finance (MOF) swapped $687 
million worth of bonds maturing in 2007 - 2011 for bonds maturing in 
2025 an 11% yield.  A December 14 MOF budget realization report 
showed actual Government of Indonesia (GOI) spending was only 75% of 
budgeted expenditure as of late November 2006, but spending rose to 
96% of targeted levels by the end of December.  The MOF also 
announced that unlike in 2005, it would not simply carry over 
unspent funds into the same spending categories in the next fiscal 
year.  On December 14, 2006 Parliament approved salary increases of 
3-10% for BI employees.  Indonesia's Financial Intelligence Unit, 
the Pusat Pelaporan dan Analisa Transaksi Keuangan (PPATK), signed 
memoranda of understanding (MOU) on December 5 with South Africa and 
the Cayman Islands to fight money laundering.  Surabaya Stock 
Exchange (SSX) shareholders agreed on December 6 to merge with the 
Jakarta Stock Exchange (JSX) by the end of 2007 to increase 
efficiency.  On December 15, Fitch Ratings announced confirmed 
ratings for four domestic banks: Bank Negara Indonesia (BNI), Bank 
Danamon, NISP, and Bank Buana.  This report uses an exchange rate of 
Rp 9,025/USD. End Summary. 
 
Inflation Increases as Rice Prices Surge 
---------------------------------------- 
 
¶2. On January 2, the Central Bureau of Statistics (BPS) announced 
that Indonesia's inflation rate accelerated in December for the 
first time in seven months, to 6.6% year-on-year (YoY) and 1.21% 
month-on-month (MoM).  The significant MoM jump is mainly due to 
higher prices for rice, which experienced an 8% spike in the first 
three weeks of the month.  The increase in rice prices contributed 
around 40% to December inflation.  Core inflation remained 
relatively low and within BI's target range at 0.65% MoM and 6.03% 
YoY.  "Inflationary pressures need to be watched.  The government 
and the central bank will continue to target inflation of 6.5%," 
Finance Minister Sri Mulyani noted after the announcement. 
 
--------------------------------------------- 
Table 1: Inflation Components - December 2006 
--------------------------------------------- - 
Component                        MoM     YoY 
--------------------------------------------- - 
Foodstuffs                       3.12   12.94 
Prepared food, beverages, 
  tobacco                        1.11    6.36 
Housing, water, electric, fuel   0.74    4.83 
Clothing                         0.13    6.84 
Health                           1.05    5.87 
Education, recreation/sports     0.07    8.13 
Transportation, communication 
and financial services           0.10    1.02 
--------------------------------------------- - 
Total                            1.21    6.60 
 
Core Inflation (1)               0.65    6.03 
--------------------------------------------- - 
 
(1) Core inflation is a measure of inflation that excludes certain 
items that exhibit volatile price movements, i.e. energy and food 
products. 
 
Source: Central Bureau of Statistics (BPS) 
 
Bank Indonesia Slows Interest Rate Cuts 
--------------------------------------- 
 
¶3.  On January 4, 2007 Bank Indonesia (BI) cut its benchmark 
interest rate by 25 bps to 9.5%, following five monthly 50-bps cuts 
since August 2006.  Analysts agree BI appears to be slowing the rate 
of monetary policy loosening and attempting to strike a prudent 
balance between the need to bring down interest rates to encourage 
bank lending while guarding against the flight of funds if the 
interest rate differentials become too narrow.  BI Governor 
Burhanuddin Abdullah noted that the Board considered the 
 
JAKARTA 00000063  002 OF 004 
 
 
macroeconomic situation in 2006 and future prospects for the economy 
when making its decision. "We are considering future risks as well 
as inflation targets for 2007 and 2008," he said.  He added that 
there are still structural problems in Indonesia's economy such as 
the weak investment climate and market structure, inadequate 
infrastructure and low productivity. "These have resulted in a 
slow-performing economy," he said.  Despite more than a half dozen 
interest rate cuts, BI still faces public pressure by the GOI to 
reduce interest rates, including from President Yudhoyono and other 
senior GOI officials. 
 
GOI Swaps Bonds 
--------------- 
 
¶4. On December 5, the MOF swapped bonds maturing in 2007-2011 
totaling Rp 6.2 trillion ($687 million) for 19-year debt priced to 
yield 11%.  With this final debt swap, the MOF exchanged in 2006 a 
total of Rp 37.8 trillion ($4.2 billion) in bonds maturing in 
2007-2011 for longer maturity bonds, an amount equivalent to 
approximately 23% of GOI debt amortizations in 2007-2011.  The GOI 
has been re-profiling its debt for several years through a series of 
maturity-extending swaps and buybacks to reduce the large number of 
bonds coming due in 2007-09. 
 
--------------------------------------------- ------ 
Table 2: MOF Bond Swaps in 2006 
--------------------------------------------- ------ 
Date      Amount   Old Bonds' New Bonds' New Bonds 
           (Rp       Yield     Yield      Tenor 
         trillion)    (%)       (%)       (yrs) 
--------------------------------------------- ------ 
March 2    7.6    12.8 - 13.2   12.8        15 
March 23   8.5    11.8 - 13.2   12.1         5 
June 27    3.1    12.1 - 12.6   13.2         6 
July 25    2.4    9.5 - 14      12.8        15 
August 8   4.4    9.5 - 14      12.0        15 
August 29  0.2    11.2 - 12.1   11.8        12 
Sept. 26   0.1    9 - 10        11.3        19 
Oct. 17    4.3    9.5 - 14      11.0        15 
Nov. 21    0.9    9.3 - 11.3    11.0         8 
Dec. 5     6.2    8.5 - 11.4    11.0        19 
 
Source: Ministry of Finance 
 
2006 Budget Deficit Smaller than Target 
--------------------------------------- 
 
¶5.  On January 4, the MOF issued a report on the implementation of 
the 2006 budget showing that actual GOI spending up to December 29, 
2006 was Rp 669.9 trillion ($74.2 billion), or 95.8% of the budgeted 
amount.  The report demonstrates that government spending was heavy 
in December 2006, since realized spending at the end of November was 
only been 75% of the targeted amount.  The central government spent 
Rp 443.5 trillion ($49.1 billion) or 92.7% of the targeted Rp 478.2 
trillion ($53 billion).  Local government spending reached Rp 226.4 
trillion ($25.1 billion) or 102.5% of the targeted Rp 220.9 trillion 
($24.5 billion).  MOF Director General for the Treasury Herry 
Purnomo said Parliament and GOI have agreed that unlike in 2005, 
unspent funds will not be carried over to 2007 in their existing 
allocation categories. Instead, unused 2006 funds will be 
re-allocated, possibly between ministries, a decision that should 
encourage ministries to spend their full budget allocations in the 
current fiscal year. 
 
¶6.  As of December 29, GOI revenues reached Rp 637.8 trillion ($70.7 
billion), or 96.8% of the full year target.  Tax revenues make up 
the largest component of total revenues at Rp 409 trillion ($45.3 
billion) or 96.2% of the targeted Rp 425.1 trillion ($47.1 billion). 
 Non-tax revenue reached Rp 226.9 trillion ($25.1 billion) or 98.7% 
of the targeted Rp 229.8 trillion ($25.5 billion).  The budget 
realization report indicated that the budget showed a deficit of Rp 
32.1 trillion ($3.6 biillion billion), equivalent to 1.0% of Gross 
Domestic Product (GDP).  The 2006 budget passed by Parliament 
targeted a deficit equivalent to 1.3% of GDP. 
 
No Rupiah Intervention 
---------------------- 
 
 
JAKARTA 00000063  003 OF 004 
 
 
¶7.  In a December 29 interview with the Asian Wall Street Journal 
(ASWJ), Finance Minister Sri Mulyani Indrawati reportedly said that 
the Indonesian government does not believe its currency is 
overvalued and has no intention of intervening in financial markets 
to cool inflows of foreign capital into stocks, bonds and other 
assets.  She added that the GOI economic team believes that 
continued foreign investment will be critical to maintaining high 
GDP growth.  "The (competitiveness) of the economy should not rely 
on exchange-rate policy. We are not manipulating the level (of the 
rupiah) -- we maintain policy consistency.  This is what investors 
want to hear from us," Mulyani said.  She also argued that 
Indonesia's economic situation is different from that of Thailand. 
According to the ASWJ report, the rupiah has appreciated about 7% 
against the dollar this year, less than half the increase in the 
value of the Thai baht.  The average Rp/USD exchange rate stood at 
9,166/USD in 2006, compared to 9,500/USD in 2005.  The currency 
closed at 9,020/USD at the end of 2006. 
 
JSX Third Best Performing Bourse in 2006 
---------------------------------------- 
 
¶8. The Jakarta Stock Exchange's (JSX) composite index closed at 
1,805 on December 28, the last trading day in 2006.  The index 
increased by 55.3% in 2006, compared to a 16.4% increase in 2005 and 
44.6% in 2004.  The JSX was the third best performing stock exchange 
in the world in 2006 after bourses in China and Russia.  JSX market 
capitalization surged by 55.6% in 2006, reaching Rp 1,246 trillion 
($138 billion) compared to Rp 801 trillion ($89 billion) in 2005. 
There were 12 new listings in 2006, bringing the total number of 
listed companies in the JSX to 344. 
 
Stock Exchanges Agree To Merge 
------------------------------ 
 
¶9.  In an extraordinary general meeting on December 6, shareholders 
of the Surabaya Stock Exchange (SSX) agreed to merge with the JSX. 
Management expects the merger to be completed by the end of 2007 and 
looks forward to improved efficiency by combining the exchanges. 
The SSX lists about 200 stocks and 66 corporate bonds, while the JSX 
lists 344 stocks.  JSX shareholders previously agreed to the merger 
in May 2006.  The GOI recommended the two exchanges merge by the end 
of 2006 to improve the efficiency of Indonesia's capital markets 
under its July 2006 financial sector policy package. 
 
Salary Increases for Central Bank 
--------------------------------- 
 
¶10.  At a December 14 hearing, Parliament's Commission XI for 
Banking and Finance approved a salary increase for Bank Indonesia's 
employees of 3-4% for the board, and 7-10% for middle management and 
staff.  Commission Chairman Awal Kusumah stated that the increase 
aims to adjust the current wage system and reduce the gap between 
the levels of employees.  The Commission also approved BI's proposed 
budget for human resource management of Rp 2.8 trillion ($310 
million) in 2007.  The approval is based on BI's projected revenue 
for 2007. 
 
PPATK Signs Anti-Money Laundering MOUs 
-------------------------------------- 
 
¶11. On December 5, the Financial Transaction Reporting and Analysis 
Center (Pusat Pelaporan dan Analisa Transaksi Keuangan or "PPATK") 
signed memoranda of understanding (MOUs) with the financial 
intelligence units of the Cayman Islands and South Africa.  Under 
the MOUs, the parties agreed to exchange information linked to money 
laundering and terrorist financing.  Indonesia launched the PPATK in 
October 2003 to help combat illicit money flows.  The unit has 
already entered similar cooperation agreements with 17 other 
financial intelligence agencies. 
 
Fitch Ratings for Danamon, NISP, Buana, BNI 
------------------------------------------- 
 
¶12. In a December 15 press release, Fitch Ratings affirmed the 
ratings for Indonesia's third largest bank, state-owned Bank Negara 
Indonesia (BNI).  Fitch also re-affirmed the ratings of Indonesia's 
fifth largest bank, Bank Danamon; fourteenth largest bank, Bank 
NISP; and sixteenth largest bank, Bank Buana.  The outlook for all 
 
JAKARTA 00000063  004 OF 004 
 
 
the ratings is stable.  Fitch's press release made the following 
points about the ratings for the four banks: 
 
--BNI's ratings reveal its continued weak asset quality, while 
noting moderate improvement in profitability and capital position. 
More stringent regulation of loan classification and weakening 
economic conditions in 2005 resulted in BNI's non-performing loans 
(NPLs) increasing from 13.7% of gross loans at the end 2005 to 16.6% 
in Q3 2006.  Fitch viewed "with some concern" the rising trend in 
NPLs for the SME segment from 9.6% at end-2005 to 17.5% at the end 
of the third quarter of 2006, given that the SME segment will be a 
focus for future loan expansion (along with consumer loans).  The 
agency also believes that BNI needs stronger reserves cover than the 
40% level (of NPLs) at end-September 2006 given the generally weak 
recoveries expected for impaired loans. 
 
--Danamon's ratings reflect its adequate capital position and 
reduced but still reasonably strong profitability due to its 
high-yield loan business, which helps to offset higher provisioning 
costs following weaker loan quality from end-2005. 
 
--Bank NISP's ratings reflects support from its financially strong 
parent, Singapore-based OCBC Bank, which became a majority 
shareholder in early 2005, as well as its satisfactory profitability 
and a reasonably strong balance sheet with higher NPL offsets. 
 
--Buana's ratings also indicates the strength of Singapore-based 
parent United Overseas Bank, as well as the bank's own solid capital 
position and profitability. 
 
--------------------------------------------- ------ 
Table 3: Fitch Ratings for Danamon, NISP, Buana, 
and BNI 
--------------------------------------------- ------ 
                             Danamon NISP Buana BNI 
--------------------------------------------- ------ 
Long-term foreign currency   BB-     BB-  BB-   BB- 
Short-term foreign currency  B       B    B     B 
National long-term           AA-     AA+  AA+   A+ 
Individual                   C/D     C/D  C/D   D 
Support                      4       3    3     4 
 
Source: www.fitchratings.com 
 
--------------------------------------------- ------ 
Table 4:  Selected Economic, Financial, and Trade Statistics, 
September - December 2006 
--------------------------------------------- ------ 
                          Sep     Oct    Nov   Dec 
--------------------------------------------- ------ 
CPI inflation (YoY)      14.55   6.29   5.27   6.60 
 
CPI inflation (MoM)       0.38   0.86   0.34   1.21 
 
Rp/USD Exch. rate(1)     9,235  9,107  9,140  9,020 
 
30-day SBI rate (1)      11.25  10.75  10.25   9.75 
 
Foreign Res. ($ bn)(1)    42.3   39.9   41.6   42.6 
 
JSX Composite Index(1)   1,534  1,583  1,719  1,805 
 
Exports ($ billion)        8.8    8.7    8.9 
 
Percent change (YoY)      16.7   16.4   17.6 
 
Imports ($ billion)        5.7    4.5    5.9 
 
Percent change (YoY)       4.0    3.1    6.1 
 
Trade Balance              3.1    4.2    3.0 
 
Source: Bank Indonesia, BPS, JSX 
(1) End of period 
 
PASCOE