VZCZCXRO0835
PP RUEHCHI RUEHDT RUEHHM
DE RUEHJA #0688/01 0680844
ZNR UUUUU ZZH
P 090844Z MAR 07
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC PRIORITY 3733
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUEHKO/AMEMBASSY TOKYO 0339
RUEHBJ/AMEMBASSY BEIJING 3925
RUEHBY/AMEMBASSY CANBERRA 0509
RUEHUL/AMEMBASSY SEOUL 3951
ZEN/AMCONSUL SURABAYA

UNCLAS SECTION 01 OF 03 JAKARTA 000688 
 
SIPDIS 
 
FROM AMCONSUL SURABAYA 0028 
 
DEPT FOR EAP/MTS, EB/IDF/ODF 
COMMERCE FOR 4430-GOLIKE 
TREASURY FOR IA-ANDY BAUKOL 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958:  N/A 
TAGS: ECON EINV EAID PGOV KCOR ID
SUBJECT: Yogyakarta Earthquake: Economic Recovery Rapid, 
Sustainability Questioned 
 
Refs: A: 06 Jakarta 13583 
       B: 06 Jakarta 6779 notal 
 
¶1. (SBU) SUMMARY.  The May 2006 earthquake that shook Yogyakarta and 
surrounding areas caused $2-3 billion of damage and destroyed over 
33,000 businesses, mostly small and medium enterprises (SMEs). 
ConGen Surabaya visited the affected areas on February 12-13, 2007 
and met regional economic and business contacts to assess the 
recovery to date.  Economic data shows the local economy suffered 
immediately after the quake and began a rapid recovery once 
government reconstruction funds began arriving.  Ongoing regional 
reconstruction efforts are creating a tight labor market and rising 
wages.  Our business contacts say labor market conditions and 
limited availability of working capital are delaying the reopening 
of SMEs and resumption of normal business operations.  Economic 
contacts suggest capacity building for SMEs, micro-credit lending 
and basic management consulting services as means to assist small 
business recovery.  Even large businesses are struggling to recover 
employees and maintain customer orders in the aftermath of the 
earthquake.  Residents complain that local governments are 
misappropriating GOI reconstruction funds, which are in any case 
insufficient to replace damaged homes.   END SUMMARY. 
 
Earthquake and Response Summary 
------------------------------- 
 
¶2. A powerful earthquake shook the Indonesian province of Yogyakarta 
and surrounding areas on the morning of May 27, 2006.  The 
earthquake caused $2-3 billion in damages in several regencies of 
the Yogyakarta and Central Java provinces.  Final reports confirmed 
more than 5,700 people dead, 57,000 people injured and 237,400 
houses destroyed or damaged beyond repair (Ref B).  The U.S. 
military provided a fully staffed, temporary emergency medical 
hospital, instrumental in preventing additional loss of life. 
USAID/OFDA made available $6 million of immediate relief and 
recovery assistance, mainly funding construction of over 10,000 
temporary housing units, safe water and sanitation and 
shelter-related training. (Ref A). 
 
¶3. The GOI announced its plan to provide $1.2 billion for earthquake 
reconstruction, $131.4 million earmarked for housing during 2006, 
with an additional $240 million of housing funds made available in 
¶2007.  These funds are targeted primarily for permanent housing 
replacement.  Other GOI funds are targeted for school, hospital and 
infrastructure repair and replacement.  According to local officials 
the housing replacement funds began arriving in October 2006, 
starting a local construction boom.  Our contacts are not aware of 
any GOI or donor programs or funds directed for the recovery of 
businesses after the earthquake. 
 
GOI Reconstruction Funds Push Local Economy 
------------------------------------------- 
 
¶4. (SBU) Immediately after the earthquake, with over 33,000 
businesses destroyed and many families in mourning, the regional 
economy slowed dramatically, according the Bagus Santoso, Professor 
of Development Economics at Gajah Mada University in Yogyakarta. 
His analysis shows the regional economy contracted at more than a 
15% annual rate for the four months after the quake until the 
reconstruction funds began arriving.  Fourth quarter 2006 growth 
recovered strongly, spurred by the large cash infusion.  The 
Yogyakarta regional economy ended up growing 3.0% in 2006, compared 
to 4.6% growth in 2005.  Santoso projects 2007 Yogyakarta regional 
growth to exceed 5.0%.  Santoso remarked that, unlike Aceh, prices 
of construction materials had not jumped up significantly, even 
though construction of tens of thousands of new homes has begun.  He 
noted that building materials stockpiles were transported from other 
parts of Central Java and many of the surviving small businesses 
dropped their traditional product lines to start manufacturing of 
local construction materials. 
 
Labor Market Tightening 
----------------------- 
 
¶5. (SBU) GOI efforts to rebuild the 1,600 public schools and dozens 
of hospitals and medical clinics destroyed have increased local 
labor demand.  Wages for day construction laborers have more than 
 
JAKARTA 00000688  002 OF 003 
 
 
doubled, increasing local incomes and attracting workers from 
outside the region.  High wage rates are attracting skilled workers 
trained in traditional local industries to work as unskilled 
construction laborers.  The tight labor market is limiting the 
ability of many small and medium enterprises damaged by the 
earthquake to resume normal operations due to high labor costs and 
lack of skilled labor availability. 
 
Local SMEs Lack Capital, Collateral to Reopen 
--------------------------------------------- 
 
¶6. (SBU) In addition to rising labor costs, a significant impediment 
to SMEs resuming operation is a lack of capital.  Economists and 
business association contacts tell us that the damaged businesses 
have no way to raise capital to restart operations because the 
collateral value of their property was greatly reduced by the quake. 
 Bank Indonesia (BI) has implemented rules forestalling foreclosure 
on non-performing business loans.  However, the business owner's 
real estate still secures their existing loans preventing them from 
borrowing fresh capital to replace lost materials and equipment and 
repair damaged structures.  The traditional practice of family and 
friends loaning funds in emergencies is generally no longer a useful 
source as many families must direct remaining savings to home 
repairs or medical fees for earthquake-related injuries. 
 
¶7. (SBU) Our Yogyakarta business and economic contacts expressed 
concern that the regional economy is currently strong but 
unsustainable.  Once the reconstruction funds are depleted, they 
fear the tens of thousands of businesses that have been dormant 
during reconstruction will face great hardship recovering customer 
bases and successfully reopening.  There is little confidence that 
the banking system has sufficient micro-lending capacity to respond 
to the looming need, according to Dr. Mudrajat Kuncoro, economics 
professor at Gajah Mada University and leader of the SME Recovery 
Center.  Kuncoro added that there are no more than 50 lenders in all 
of Yogyakarta trained to make the kinds of small business loans 
needed.  He suggested any type of SME and micro-lending capacity 
building programs available would have a tremendous impact assisting 
local businesses to recover. 
 
¶8. (SBU) Edy Suandi Hamid, Rector of the Indonesian Islamic 
University in Yogyakarta and Head of the local chapter of the 
Indonesian Economist Association (ISEI), told us that the ISEI is 
developing a management consulting program to assist SMEs closed by 
the earthquake to reopen.  They have a group of volunteers, 
primarily local academics and accountants, willing to give their 
time and expertise to business owners.  Hamid described goals 
similar to those of the USAID/SENADA Indonesia Competitiveness 
Program which operates in other cities in Indonesia.  ISEI has not 
developed any type of systematic approach to providing consulting 
services.  Hamid thought that bringing the Indonesia Competitiveness 
Program to Yogyakarta, even if to just train their volunteers, would 
provide great benefit to businesses in need of assistance. 
 
A Recovery Story 
---------------- 
 
¶9. (SBU) PT. Rumindo Pratama (Rumindo) is an example of a large 
scale business's struggles in the aftermath of the earthquake. 
Rumindo is one of the largest employers in the most heavily affected 
area of Yogyakarta, manufacturing more than 700,000 handmade women's 
handbags per year for export.  Their products are featured in many 
major U.S. retail outlets such as J.C. Penny and Macy's.  Prior to 
the earthquake, Rumindo employed 5,400 villagers in rural areas 
around Yogyakarta handcrafting woven bags and 600 at their factory 
finishing and shipping the bags.  The Rumindo factory was completely 
destroyed by the quake.  Within a week, they identified an abandoned 
furniture factory still standing.  As their employees returned to 
work, they began salvaging equipment and materials to reassemble 
their production lines and get back in business.  By day, senior 
management traveled to all of their village-based employees 
consoling them and encouraging them to resume working.  By night, 
senior managers reassured nervous customers in the U.S. and Europe 
that Rumindo would complete their orders in time for the following 
spring season.  Despite their gargantuan efforts, Rumindo lost one 
third of their workforce to death, injury, depression and higher 
paying construction work and one half of their orders to competitors 
 
JAKARTA 00000688  003 OF 003 
 
 
in China and Thailand willing to take advantage of their misfortune. 
 Rumindo management feels fortunate they survived the worst and 
remain in business. 
 
Residents Struggle to Rebuild 
----------------------------- 
 
¶10. Interviews with local residents rebuilding their homes revealed 
several areas of dissatisfaction with the GOI recovery program.  The 
most vocal complaint was that the Rp. 15 million ($1,650) provided 
by the government per house was only sufficient to build a 
foundation, walls and a roof.  There are no funds for windows, 
doors, electricity, lights, fans, plumbing or floors provided.  What 
little savings the villagers had was already spent on funeral 
expenses, medical bills and living expenses for their unemployed 
family and friends for the past nine months.  Their other frequent 
complaint was that corruption by facilitators and local officials 
was costing 10-20% of their government awards.  Paying small 
"gratuities" to local officials for simple government services is a 
normal part life in the village.  However, residents became animated 
at the large sums being demanded to facilitate local building 
department approvals and "guarantees" that their new homes would 
pass earthquake safety standards without regard to the construction 
techniques or materials used.  The GOI reconstruction program 
requires homes pass minimum earthquake safety standards in order to 
receive the next stage of funds. 
 
An Unmet Need 
------------- 
 
¶11. (SBU) The GOI and the donor community have focused on the most 
immediate needs for medical care and shelter replacement. 
Yogyakarta residents expressed gratitude for the assistance they 
have received.  A spirit of cooperation was evident in villages as 
community members worked on rebuilding each others homes.  Our 
contacts and local residents spoke of the importance of "Gotong 
Royang", or community connectedness, and their hope that the "social 
capital" at the village level can be translated into financial 
capital to restart lost businesses.  The economic recovery is 
heading to its next stage where residents are ready to focus on 
regaining lost livelihoods.  An opportunity may exist to leverage 
existing USG sponsored business assistance programs to address an 
unmet long-term recovery need of the Yogyakarta region.  Activities 
along this line are likely to happen in the near future as SENADA 
begins redirecting its regional focus and expanding business 
management assistance in the greater area of Central Java, including 
Yogyakarta. 
 
PIERANGELO/HEFFERN