VZCZCXRO0828
RR RUEHCHI RUEHDT RUEHHM
DE RUEHJA #0790/01 0800330
ZNR UUUUU ZZH
R 210330Z MAR 07
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 3920
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHKO/AMEMBASSY TOKYO 0417
RUEHBJ/AMEMBASSY BEIJING 4002
RUEHBY/AMEMBASSY CANBERRA 0554
RUEHUL/AMEMBASSY SEOUL 4021
RUEAIIA/CIA WASHDC

UNCLAS SECTION 01 OF 06 JAKARTA 000790 
 
SIPDIS 
 
SIPDIS 
 
DEPT FOR EAP/MTS AND EB/IFD/OMA 
TREASURY FOR IA-SETH SEARLS 
SINGAPORE FOR BAKER 
COMMERCE FOR 4430/BERLINGUETTE 
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 FEBRUARY 
2007 
 
 
¶1. Summary.  Despite economic disruption due to severe flooding in 
Jakarta February 2-11, month-on-month (MoM) consumer price inflation 
in Indonesia rose modestly by 0.6% in February 2007, or 6.3% 
year-on-year (YoY).  In response, Bank Indonesia (BI) cut its 
benchmark 30-day BI Certificate (SBI) interest rate by 25 basis 
points (bps) to 9% on March 6, the lowest rate since September 2005. 
 Along with other emerging markets, Indonesia experienced 
significant currency volatility in late February and early March 
2007, with the rupiah depreciating 1.7% over the period.  The 
Government of Indonesia (GOI) raised a total of Rp 17.4 trillion 
($1.9 billion) from domestic debt swaps and bond auctions in January 
and February 2007.  On February 7, the GOI issued $1.5 billion of 
dollar-denominated 30-year global bonds, yielding 6.75%.  Ratings 
agencies Fitch and Moody's raised Indonesia's sovereign rating 
outlook from stable to positive on January 29 and February 4 
respectively.  After numerous delays in its privatization program, 
the GOI submitted to Parliament on February 12 a list of state-owned 
enterprises (SOEs) for partial privatization.  On February 16, the 
State Minister for State-Owned Enterprises Sugiharto installed new 
boards of Directors and Commissioners at state pension company 
Jamsostek, Indonesia's largest pension fund with Rp 31 trillion 
($3.4 billion) under management.  This report uses an exchange rate 
of 9,160 per dollar.  End summary. 
 
Benign Inflation Data Leads to BI Rate Cut 
------------------------------------------ 
 
¶2.  On March 1, the Central Bureau of Statistics (BPS) announced 
that the Consumer Price Index (CPI) rose modestly by 0.62% in 
February 2007, or 6.3% YoY, lower than expected.  The benign 
inflation data surprised analysts, many of whom believed severe 
flooding in Jakarta February 2-11 would cause a jump in February 
inflation.  Although February food inflation reached only 0.84% MoM, 
BPS data showed a 7.8% increase for the grains subgroup.  Prices for 
other food subgroups declined, including spices, which fell by 
8.17%.  Rice prices (medium quality) have increased by around 14% 
since the beginning of 2007 and in early March are approximately 35% 
higher than the government's desired price level.  Government 
officials reportedly said price increases have slowed due to the 
Government's decision to import 500,000 tons of rice between March 
and April this year. 
 
-------------------------------------------- 
Table 1: Consumer Price Inflation Components 
         January - February 2007 
-------------------------------------------- 
Component              January      February 
                      MoM    YoY   MoM   YoY 
-------------------------------------------- 
Foodstuffs            2.7    11.2  0.8  10.8 
Prepared food, 
beverages, tobacco    0.9     6.3  0.7   6.3 
Housing, water, 
electric, fuel        0.7     4.9  0.8    5.1 
Clothing             -0.3     5.8  0.6    5.6 
Health                0.5     5.3  0.6    5.6 
Education, 
recreation/sports     0.1     8.0  0.2    8.6 
Transportation, 
communication and 
financialservices    0.1     1.2  0.0    1.0 
--------------------------------------------- 
Total                1.0     6.3  0.6    6.3 
--------------------------------------------- 
Core Inflation (1)   0.7     6.1  0.6    6.0 
--------------------------------------------- 
 
(1) Core inflation excludes cdrpi(  tems that face volatile price 
movements i.e. energy, fond r"odc"ts. 
 
Source: Central Bureau of Statistics (BPS) 
 
¶3.  On February 6, Bank Indonesia (BI) cut its benchmark 30-day SBI 
rate by a 25 basis points to .*25%, stating that inflation is 
"stabilizing" ataapproximately 6.1%.  In light of the 
lower-than-x(pected February inflation, BI cut its 30-day SBI aate 
by another 25 bps to 9% on March 6, the lowest level since September 
 
JAKARTA 00000790  002 OF 006 
 
 
¶2005. 
 
Indonesia Weathers Emerging Market Volatility 
--------------------------------------------- 
 
¶4.  Along with other emerging markets, Indonesia experienced 
significant capital market volatility in late February and early 
March 2007.  The rupiah came under pressure in the last week of 
February 2007, with the currency's largest one day decline occurring 
on February 28, when it fell 0.9% from Rp 9,070/USD to Rp 9,160/USD. 
 It continued to drift lower in early March, closing at Rp 9,220/USD 
on March 16.  Over the February 20 - March 16 period, the rupiah 
declined by 1.7% against the dollar.  The Jakarta Stock Exchange's 
(JSX) composite index went on a bumpier ride, declining 6.9% from 
February 21 - March 5.  On March 5, the JSX came under heavy selling 
pressure along with other countries in the region, with the 
composite index falling by 3.6% during the day to 1,699.  However, 
it bounced back by 1.9% on March 6, and as of March 16 stood at 
1,778, representing an overall decline of 2.2% from February 20 - 
March 16. 
 
Government Debt Market Update 
----------------------------- 
 
¶5. On January 9, the Ministry of Finance (MOF) raised Rp 1.6 
trillion ($175 million) from swapping rupiah bonds maturing 
2007-2011 for 19-year bonds priced to yield 10.2%.  A subsequent 
bond buy-back  on January 30, at which the MOF offered to swap bonds 
maturing 2008-2012 for 20-year debt, met with a good response, 
raising Rp 5.9 trillion ($644 million).  The 20-year bonds were 
priced to yield 10.5%.  A February 13 debt swap was less successful, 
with the GOI raising only Rp 1.1 trillion ($120 million) from 
swapping bonds maturing in 2008 with 20-year bonds. 
 
¶6.  The GOI raised a total of Rp 8.8 trillion ($961 million) from 
bond auctions on January 23 and February 20.  At the January 23 
auction, the MOF sold Rp 4.8 trillion ($524 million) of bonds 
maturing in 2027 at a 10.5% yield.  On February 20, the MOF sold Rp 
4 trillion ($437 million) of 15-year bonds priced to yield at 10.7%. 
 
 
--------------------------------------------- -- 
Table 2: GOI Debt Swaps and Auctions 
January - February 2007 (in Rp trillion) 
--------------------------------------------- -- 
2007 target                                66.7 
January 9          Swap                     1.6 
January 23         Auction                  4.8 
January 30         Swap                     5.9 
February 13        Swap                     1.1 
February 20        Auction                  4.0 
--------------------------------------------- -- 
TOTAL                                      17.4 
 
Source: Ministry of Finance 
 
Investors Snap Up Indonesian Sovereign Bonds 
-------------------------------------------- 
 
¶7. On February 7, the MOF issued $1.5 billion of dollar-denominated 
global bonds, Indonesia's fifth global bond offering since 2004. 
The bonds will mature in 2037 and offer a 6.75% yield.  According to 
Bank Indonesia, 38% of the buyers were Asian, 37% came from the 
United States, and 25% came from Europe.  Standard & Poor's gave the 
bonds a "BB-" rating, four steps below investment grade, while Fitch 
Ratings and Moody's Investor Service rated the bonds "B1".  The 
offering was noteworthy for being the largest 30-year dollar bond 
issuance by a Southeast Asian issuer to date, and for being priced 
at 189 bps over the 30-yr U.S. Treasury rate, the tightest spread of 
any Indonesian global bond offering to date. 
 
------------------------------------------ 
Table 3: Indonesia - Global Bond Yields 
         2004 - 2007 
------------------------------------------ 
Date             Amount/Tenor     Yield 
------------------------------------------ 
 
JAKARTA 00000790  003 OF 006 
 
 
March 2004      $1 bill/10 yr     6.85% 
April 2005      $1 bill/10 yr     7.375% 
Oct.  2005    $900 mill/10 yr     7.625% 
              $600 mill/30 yr     8.625% 
March 2006      $1 bill/11 yr     7.00% 
Feb.  2007    $1.5 bill/30 yr     6.75% 
 
Source: Ministry of Finance, Bloomberg 
 
Fitch and Moody's Upgrade Indonesia 
----------------------------------- 
 
¶8. On January 29, Fitch Ratings revised the outlook on Indonesia' 
foreign and local currency ratings from stable to positive, while 
affirming both ratings at "BB-".  The agency also affirmed 
Indonesia's short-term default rating at "B" and the country ceiling 
at "BB".  According to a Fitch statement, the revision of 
Indonesia's sovereign ratings "reflects the GOI commitment to 
maintaining economic stability and fiscal discipline, as well as the 
Government's stronger top-down implementation of structural reforms 
aimed at improving the investment climate."  Fitch forecasts 
Indonesia's fiscal deficit will stay manageable at 1.1% of GDP this 
year, while the government debt-to-GDP ratio should drop to around 
38%.  According to the agency, "although external balance sheet 
risks remain, a stronger reserve position provides a cushion for 
shocks." 
 
¶9. On February 4, Moody's Investor Service also changed the outlook 
on Indonesia's B1 foreign and local currency government bonds from 
stable to positive.  Moody's noted that this "reflects the steady 
improvement of the government's debt position."  Moody's also 
changed the outlook on Indonesia's Ba3 foreign currency country 
ceiling for bonds and the B2 foreign currency country ceiling for 
bank deposits to positive from stable.  "The government's prudent 
fiscal policy is likely to continue for the next several years," 
said Moody's Vice President Steven Hess.  "The continuation of the 
small deficits recorded during the last several years, combined with 
fairly high nominal GDP growth, has resulted in a substantial 
decline in the ratio of government debt to GDP."  Hess stated that, 
at 42% by the end of 2006, Indonesia's debt/GDP ratio is now 
comparable to countries with a higher rating, and that a future 
Moody's upgrade could result from further improvements in the 
government debt picture and policy reforms that improve the 
investment climate. 
 
Discussion Starts on Privatization 
---------------------------------- 
 
¶10. On January 31, a GOI privatization committee chaired by 
Coordinating Minister for the Economy Boediono, approved 15 
state-owned enterprises (SOEs) for partial privatization this year. 
The committee selected the 15 from a list of 24 proposed by the 
State Ministry for State-Owned Enterprises.  The GOI submitted the 
list to Parliament's Commission VI during a February 12 hearing, and 
is now waiting for Parliament's approval. 
 
--------------------------------------------- ---- 
Table 4: SOEs Submitted for Privatization in 2007 
--------------------------------------------- ---- 
                                 GOI Shares/ 
SOE         Industry   Method  to be Divested 
--------------------------------------------- ---- 
Jasa Marga  Tollroads    IPO       100/49 
BNI         Bank         SO         99/40 
Wijaya      Construction IPO       100/35 
 Karya 
PNM         Finance      SS        100/30 
Garuda      Airline      SS        100/49 
Merpati     Airline      SS         93/40 
ISI         Soda ash     SS        100/100 
Industri    Glass        SS         64/64 
 Gelas 
Cambrics 
 Primissima Textiles     SS         53/53 
Atmindo     Chemicals    SS         37/37 
Intirub     Tires        SS         10/10 
PPLI        Waste        SS          5/5 
 
JAKARTA 00000790  004 OF 006 
 
 
             Disposal 
JIHD        Property     OTC       1.3/1.3 
Kertas      Paper        SS        0.8/0.8 
 Blapak 
KBR         Paper        SS        0.4/0.4 
 
Source: Ministry of SOEs 
 
Notes: 
(1) IPO - Initial Public Offering; SO - Secondary Offering; SS - 
Strategic Sale; OTC - Over-the-counter sale. 
 
¶11. Many analysts believe, if approved, the program could jump start 
Indonesia's long-stalled privatization program and lead to improved 
performance among the 14 SOEs.  However, privatization has long been 
controversial in Indonesia and often meets with resistance in 
Parliament.  There were no significant government divestments in 
2005 - 2006. 
 
--------------------------------------------- --- 
Table 5: Privatization in 2001 - 2005 
--------------------------------------------- --- 
SOE         Divestment  Rem.    Method  Proceeds 
               (%)   GOI Shares       ($ million) 
--------------------------------------------- --- 
2001: 
Kimia Farma    9        91        IPO       11 
Indofarma     20        80        IPO       15 
Socfindo      30        10         SS       45 
Telkom        12        54      Placement  302 
 
2002: 
Indosat        8        15      Placement  104 
              42                   SS      608 
Telkom         3        51      Placement  118 
Bukit Asam    16        84         IPO      17 
WNI           42         0         SS       27 
 
2003: 
Mandiri        20       80         IPO     292 
Indocement     17       0          SS      140 
BRI            45       60         IPO     292 
PGN            39       61         IPO     140 
 
2004: 
Pembangunan 
Perumahan      49       51         EMBO      7 
Adhikarya      25       51         EMBO      7 
               25                  IPO 
Mandiri        10       70       Placement 313 
Bukit Asam     13       65          SO      20 
 
Source: Ministry of SOEs 
 
Note: 
IPO - Initial Public Offering; SS - Strategic Sale; EMBO - Employee 
Management Buy Out; SO - Secondary Offering 
 
GOI Installs New Boards at State Pension Company 
--------------------------------------------- --- 
 
¶12. At a February 16 shareholders meeting, SOE Minister Sugiharto 
appointed new boards of directors and commissioners for state 
pension company Jamsostek.  Citing Jamsostek's lack of financial and 
investment transparency, Sugiharto gave the new management eight 
months to prepare a public financial performance report.  The new 
management is reportedly looking for alternative investments to the 
time deposits that currently hold nearly 50% of the company's 
investment funds.  Jamsostek investment director Indraswari 
Kartakusu said, "considering the current environment where interest 
rates are falling, I think we have to look at other instruments, in 
the bond and equities markets."  Newly appointed President Director 
Hotbonar Sinaga was formerly Chairman of the Indonesian Insurance 
Council. 
 
¶13. Jamsostek is Indonesia's largest pension fund with Rp 31 
trillion ($3.4 billion) under management, covering 6.9 million 
 
JAKARTA 00000790  005 OF 006 
 
 
workers or 21% of the formal workforce.  The World Bank noted in a 
recent report that the company essentially functions as a 
short-term, tax-sheltered savings scheme, as opposed to the 
long-term retirement income scheme that it was designed to be. 
Neither its insurance nor old-age benefits programs fall under 
applicable Indonesian laws, but rather the company functions under 
ad hoc government regulations under the general supervision of 
Ministry of Manpower.  Jamsostek has been repeatedly criticized for 
poor investment decisions and weak governance. 
 
--------------------------------------------- - 
Table 6: Jamsostek Boards 
--------------------------------------------- - 
Position         Old Board           New Board 
--------------------------------------------- - 
 
Board of Directors: 
 
President        Iwan                Hotbonar 
 Director        Pontjowinoto        Sinaga 
 
Investment       Iskandar            Indrasjwari 
                 Rangkuti 
 
Finance          Tri Lestari         Myra Asnar 
 
Service and      Andi                Ahmad 
 Operation       Achmad              Ansyori 
 
General Affairs  Acep                Rahmaniah 
 and HR          Jayaprawira         Hasdiani 
 
Planning,        Tjarda              Suyono 
 Development &   Muchtar 
 Information 
 
Risk Management                      Dewi 
 and Compliance                      Hanggraeni 
 
Board of Commissioners: 
 
President        Prijono             Wahyu 
Commissioner     Tjiptoherijanto     Hidayat 
 
Members:         Suryo Sulisto       Myra 
                                     Hanartani 
 
                 Suparmanto          Haryadi 
                                     Sukamdani 
 
                 Didid               Rekso 
                 Damanhuri           Silaban 
 
                 Syukur Sarto        Syukur Sarto 
 
                                     Herry 
                                     Purnomo 
 
Source: Jamsostek 
 
--------------------------------------------- ------ 
Table 7:  Selected Economic, Financial, and Trade Statistics, 
November 2006 - February 2007 
--------------------------------------------- ------ 
                          Nov    Dec   Jan   Feb 
--------------------------------------------- ------ 
CPI Inflation (YoY)       5.27   6.60  6.26   6.30 
 
CPI Inflation (MoM)       0.34   1.21  1.04   0.62 
 
Rp/USD Exch. rate(1)     9,140  9,020 9,090  9,160 
 
30-day SBI rate (1)      10.25   9.75  9.50   9.25 
 
Foreign Res. ($ bn)(1)    41.6   42.6  43.3   45.7 
 
JSX Composite Index(1)   1,719  1,805 1,757  1,741 
 
JAKARTA 00000790  006 OF 006 
 
 
 
Exports ($ billion)        8.9    9.5   8.4 
 
Percent change (YoY)      17.6   16.9  10.5 
 
Imports ($ billion)        5.9    4.9   5.2 
 
Percent change (YoY)       6.1    5.9  19.5 
 
Trade Balance              3.0    4.6   3.2 
 
Source: Bank Indonesia, BPS, JSX 
(1) End of period 
 
HEFFERN