VZCZCXRO0421
RR RUEHCHI RUEHDT RUEHHM
DE RUEHJA #1102/01 1090854
ZNR UUUUU ZZH
R 190854Z APR 07
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 4399
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHKO/AMEMBASSY TOKYO 0475
RUEHBJ/AMEMBASSY BEIJING 4051
RUEHBY/AMEMBASSY CANBERRA 0673
RUEHUL/AMEMBASSY SEOUL 4049
RUEAIIA/CIA WASHDC

UNCLAS SECTION 01 OF 04 JAKARTA 001102 
 
SIPDIS 
 
SIPDIS 
 
DEPT FOR EAP/MTS AND EB/IFD/OMA 
TREASURY FOR IA-SEARLS 
SINGAPORE FOR TREASURY-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 MARCH 2007 
 
 
¶1. Summary.  On April 2, the Central Bureau of Statistics (BPS) 
announced that consumer price inflation rose a modest 0.24% in March 
on a month-on-month (MoM) basis as rice price increases moderated. 
Three days later, Bank Indonesia (BI) announced it would keep its 
benchmark 30-day Bank Indonesia Certificate (SBI) rate unchanged at 
9% after ten interest rate cuts totaling 375 basis points over the 
past 11 months.  The rupiah remained generally stable in March in 
the wake of February's emerging market volatility, appreciating by 
0.5% against the U.S. dollar.  The Jakarta Stock Exchange (JSX) 
composite index rose by 5.2% over the same period.  Minister of 
Finance Sri Mulyani Indrawati told a Parliament hearing on March 22 
that the Government of Indonesia (GOI) is considering increasing the 
2007 budget deficit to an amount equivalent to 1.5 - 2% of Gross 
Domestic Product (GDP), up from 2006's 1.1% of GDP target.  On March 
20, the Ministry of Finance (MOF) raised Rp 9.2 trillion ($1 
billion) from an auction of 10-and 15-year government bonds in which 
18 newly-appointed primary dealers participated for the first time. 
On March 26, the MOF offered Rp 6.2 trillion ($680 million) of its 
popular three-year retail bonds to the public.  Effective March 22, 
the Indonesian Deposit Insurance Corporation (LPS) reduced its 
insurance coverage to Rp 100 million ($10,970) per depositor per 
bank, the final step in the GOI's rollback of its blanket bank 
guarantee.  Several major Indonesian banks issued their 2006 
financial statements in March 2006, most of which showed increased 
profitability and improved asset quality.  Former Australian Primer 
Minister and Treasurer Paul Keating called on the GOI to give up its 
ownership in banks at the March 25-28 eighth annual Asian Banker 
Summit in Jakarta.  However, on March 26, state-owned Bank Negara 
Indonesia's (BNI) President Director Sigit Pramono confirmed the 
postponement of plans to sell a stake in the bank while the GOI 
awaits Parliamentary approval.  This cable uses an exchange rate of 
9,118/USD.  End summary. 
 
Stable Markets in March 
----------------------- 
 
¶2.  On April 2, the Central Bureau of Statistics (BPS) announced 
that consumer prices in March rose a modest 0.24% on a 
month-on-month (MoM) basis as rising rice prices continued to abate. 
 On a yearly basis, however, inflation in March 2007 stood at 6.62%, 
higher than the 6.3% recorded in February.  The BPS announced that 
core inflation for the month was 0.17% MoM, and 5.87% year-on-year 
(YoY).  BPS director Rusman Heriawan noted that the price of the 
country's main staple, rice, was now causing less concern. "Rice 
prices are now giving rise to weaker inflationary pressures.  We are 
seeing prices stabilize, and even fall slightly," he said. 
 
-------------------------------------- 
Table 1: Consumer Price Inflation 
         Components - March 2007 
-------------------------------------- 
Component                  March 
                         MoM    YoY 
-------------------------------------- 
Foodstuffs               0.24    11.97 
Prepared food, 
  beverages, tobacco     0.36     6.05 
Housing, water, 
  electric, fuel         0.29     5.04 
Clothing                 0.41     5.90 
Health                   0.20     5.38 
Education, 
  recreation/sports      0.03     8.48 
Transportation, 
  communication and 
  financial services     0.09     1.00 
-------------------------------------- 
Total                    0.24     6.52 
-------------------------------------- 
Core Inflation (1)       0.17     5.87 
-------------------------------------- 
 
(1) Core inflation is a measure of inflation which excludes certain 
items that face volatile price movements i.e. energy, food 
products. 
 
Source: Central Bureau of Statistics (BPS) 
 
 
JAKARTA 00001102  002 OF 004 
 
 
¶3. Despite signs of moderating food prices, BI kept its benchmark 
interest rate unchanged at 9% at its April 5 monetary policy board 
meeting, after a 25 bps cut on March 6.  In a statement released 
after the meeting, BI Governor Burhanuddin Abdullah noted that at 
this time, "monitoring of prices in the administered prices, staple 
goods and volatile foods categories and other macroeconomic 
indicators point to the need for a closer watch on the possibility 
of a future rise in inflation.  Public expectations of inflation are 
also predicted to follow an escalating trend in line with the 
improving outlook for domestic demand in response to increased 
economic activity."  BI expects this year's inflation to be between 
5-7%, with the key BI rate falling to 8.5% by the end of the year. 
The favorable inflation figures boosted local capital markets, with 
the JSX Composite Index rising 1% to 1,849 on April 2.  Following 
emerging market volatility in February, the rupiah remained 
generally stable in March, strengthening by 0.5%.  The rupiah was 
bolstered by improved performance in the balance of payments, and 
the continued attractiveness of yields on rupiah debt instruments. 
The JSX composite index improved by 5.2% in March over February. 
 
GOI to Run Larger 2007 Budget Deficit 
------------------------------------- 
 
¶4. During a March 22 discussion, Chairman of the Parliament's budget 
commission Emir Moeis and Finance Minister Mulyani said that the GOI 
may widen the 2007 state-budget deficit to an amount equivalent to 
1.5 - 2% of GDP, or Rp 55.2 - 73.6 trillion ($6.1 - 8.1 billion). 
The 2007 budget passed by Parliament projected a deficit of Rp 40.5 
trillion ($4.4 billion) or 1.1% of GDP. On April 11, Mulyani 
reportedly stated the GOI would use the additional funds to rebuild 
after the earthquakes in West Sumatra and Yogyakarta, repair damage 
from flooding in Jakarta and the Sidoarjo mudflow in East Java, and 
boost domestic rice output by 2 million tons.  She reportedly added 
that the GOI might need additional funds to increase support to 
state electricity company PLN.  However, Mulyani noted that the GOI 
would not announce an official figure until after discussions with 
the Parliament.  Deficit financing will likely come from domestic 
and global U.S. dollar bonds.  According to MOF Director General for 
Debt Management Rahmat Waluyanto, the GOI can safely finance the 
additional deficit assuming it raises Rp 3 trillion, or $330 
million, per month from bond auctions.  To date this year, the MOF 
has raised Rp 32.8 trillion ($3.6 billion) from rupiah-denominate 
bond auctions and swaps. 
 
Government Bond Market Update 
----------------------------- 
 
¶5.  On March 20, the MOF raised a total of Rp 9.2 trillion ($1 
billion) from several bond auctions, including Rp 4.1 trillion ($450 
million) from the sale of 10-year bonds and Rp 5.1 trillion ($560 
million) from selling 15-year bonds.  The 10 and 15-year bonds offer 
9.9% and 10.4% yields, respectively.  For the first time, 
Indonesia's newly appointed primary dealers participated in the 
auction.  On December 29, 2006 Finance Minister Sri Mulyani 
Indrawati sg"ned Ministerial Decree No. 144/2006 establishing 
Primary Dealer System for rupiah-denominated goe rnment securities. 
 
 
------------------------------------- 
Table 2: Indonesia's Primary Dealers: 
------------------------------------- 
-- Citibank N.A. 
-- Bank Lippo 
-- Deutsche Bank AG 
-- Bank Mandiri 
-- HSBC 
-- Bank Negara Indonesia 
-- Bank Central Asia 
-- Bank Panin 
-- Bank Danamon Indonesia 
-- Bank Rakyat Indonesia 
-- Bank DBS Indonesia 
-- Bank Permata 
-- Bank Internasional 
-- Standard Chartered Bank Indonesia 
-- Bahana Securities 
-- Mandiri Sekuritas 
-- Danareksa Sekuritas 
 
JAKARTA 00001102  003 OF 004 
 
 
-- Trimegah Securities 
 
¶6. On March 26, the MOF offered for the second time Rp 6.2 trillion 
($680 million) of its popular retail bonds to the public.  The 
3-year retail bonds carry a 9.3% annual coupon rate.  The government 
sold its first Rp 3.3 trillion ($362 million) of retail bonds in 
August 2006, in an action many analysts termed a big success. 
Director General for Debt Management Rachmat Waluyanto told the 
media "there was strong demand for a second retail bond due to 
expectations of a downtrend in interest rates until the end of the 
year." 
 
Final Roll-Back of Blanket Guarantee 
------------------------------------ 
 
¶7. Effective March 22, the Indonesian Deposit Insurance Corporation 
(LPS) reduced its deposit insurance coverage to Rp 100 million 
($10,970) per depositor per bank, the final step in the GOI's 
reduction of its blanket bank guarantee.  The move appeared to cause 
no disruption to the banking sector, although some large depositors 
divided accounts inside a single bank, moved them to larger banks, 
or distributed money among different banks. 
 
Indonesia Hosts Asian Bankers Summit 
------------------------------------ 
 
¶8. Banking leaders from Asia, Europe, U.S. and Australia 
participated the eighth annual Asian Banker Summit on March 25-28 in 
Jakarta.  Over 500 banking professionals from more than 24 countries 
exchanged ideas on regional and global issues at the three-day 
summit, according the Indonesian Bank Association Chairman Sigit 
Pramono.  In his keynote speech at the summit, BI Governor 
Burhanuddin Abdullah said Indonesia's banking sector has come a long 
way since the crisis, when the government was forced to inject huge 
amounts of public funds into the industry to prevent its collapse. 
Many bankers attending the event acknowledged that Indonesia's 
banking sector has recovered from the crisis.  Summit director Fiona 
Shaw said the Indonesian banking sector had made tremendous progress 
since 1997 through a series of mergers, acquisitions, consolidations 
and fairly successful micro-financing schemes.  "We decided to pick 
Jakarta (for the summit venue) because we thought it was time to 
showcase the progress to the rest of the world," Shaw said. 
 
¶9. Former Australian Primer Minister and Treasurer Paul Keating, 
however, said that Indonesia needs to give up government ownership 
of banks and improve its risk management capabilities.  "Governments 
should steer the boat, not row the boat," focusing on regulation 
rather than ownership, he noted.  Government ownership of banks 
creates unhealthy risk within the industry and could jeopardize the 
state budget, Keating reportedly said, because bank management 
assumes the government will step in if they find themselves in 
trouble.  Private capital is generally more careful about loan 
quality, Keating reportedly added. 
 
BNI Divestment Delayed 
---------------------- 
 
¶10. On February 25, a member of Parliament's Working Committee on 
Privatization announced the committee would delay a decision on 
whether to divest a portion of state-owned Bank Negara Indonesia 
(BNI), Indonesia's third largest lender.  The GOI reportedly wanted 
to sell 20% of BNI's shares in the first-phase of the planned 
divestment, while a number of members of the Working Committee 
demanded that the divestment be limited to 15% of the bank's shares. 
"The decision of the Committee is based on 2007 State Budget," Anna 
Mu'awanah, a member of the Working Committee from the National 
Awakening Party Faction, told reporters.  However, Sugiharto 
reportedly said that the resolutions of the Working Committee "could 
still be altered."  Finance Minister Sri Mulyani Indrawati said she 
hoped that the BNI share offering could contribute substantially to 
privatization proceeds in 2007.  On March 26, BNI President Director 
Sigit Pramono confirmed the postponement, which comes as the GOI is 
awaiting Parliamentary approval for its plans to sell stakes in 15 
state-owned enterprises to meet an expanded 2007 privatization 
target of Rp 4.3 trillion ($471.6 million), up from Rp 3.3 trillion 
($361.9 million) in the current budget. 
 
--------------------------------------------- ------ 
 
JAKARTA 00001102  004 OF 004 
 
 
Table 4:  Selected Economic, Financial, and Trade Statistics, 
December 2006 - March 2007 
--------------------------------------------- ------ 
                          Dec   Jan    Feb    Mar 
--------------------------------------------- ------ 
CPI Inflation (YoY)       6.60  6.26   6.30   6.52 
 
CPI Inflation (MoM)       1.21  1.04   0.62   0.24 
 
Rp/USD Exch. rate(1)     9,020 9,090  9,160  9,118 
 
30-day SBI rate (1)       9.75  9.50   9.25   9.00 
 
Foreign Res. ($ bn)(1)    42.6  43.3   45.7   47.2 
 
JSX Composite Index(1)   1,805 1,757  1,741  1,831 
 
Exports ($ billion)        9.5   8.4    8.3 
 
Percent change (YoY)      16.9  10.5   11.5 
 
Imports ($ billion)        4.9   5.2    4.7 
 
Percent change (YoY)       5.9  19.5   11.1 
 
Trade Balance              4.6   3.2    3.6 
 
Source: Bank Indonesia, BPS, JSX 
(1) End of period 
 
HEFFERN