VZCZCXRO9818
RR RUEHCHI RUEHDT RUEHHM
DE RUEHJA #2609/01 2610002
ZNR UUUUU ZZH
R 180002Z SEP 07
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 6303
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHKO/AMEMBASSY TOKYO 0807
RUEHBJ/AMEMBASSY BEIJING 4316
RUEHBY/AMEMBASSY CANBERRA 1186
RUEHUL/AMEMBASSY SEOUL 4196
RUEAIIA/CIA WASHDC

UNCLAS SECTION 01 OF 02 JAKARTA 002609 
 
SIPDIS 
 
SIPDIS 
SENSITIVE 
 
DEPT FOR EAP/MTS AND EB/IFD/OMA 
TREASURY FOR IA-SETH SEARLS AND JWEEKS 
SINGAPORE FOR SBAKER 
TOKYO FOR MGREWE 
COMMERCE FOR 4430/BERLINGUETTE 
DEPARTMENT PASS FEDERAL RESERVE SAN FRANCISCO FOR TCURRAN 
DEPARTMENT PASS EXIM BANK 
 
E.O. 12598: N/A 
TAGS: EFIN EINV ECON PGOV ID
SUBJECT: BANK INDONESIA BRIEFS UNDER SECRETARY JEFFERY ON ECONOMY, 
BANKING SECTOR 
 
 
¶1.  (SBU) Summary.  Two Bank Indonesia (BI) Deputy Governors briefed 
visiting Under Secretary Jeffery on Indonesia's macroeconomic 
success in recent years; BI's effort to improve the formal 
arrangement for managing economic and financial crises; and the 
central bank's work to prevent large-scale crises from occurring in 
the future.  BI officials also requested additional technical 
assistance and training from U.S supervisory authorities.  Under 
Secretary Jeffery congratulated BI on its significant progress in 
 
SIPDIS 
improving the soundness of the financial sector and promoting 
macroeconomic stability in Indonesia.  End Summary. 
 
BI Officials Detail Success, Challenges 
--------------------------------------- 
 
¶2. (SBU) Deputy Governor for Internal Finance and Central Banking 
Studies Bun Bunan E.J. Hutapea provided an overview of Indonesia's 
macroeconomic success in recent years.  He noted that the Indonesian 
economy has finally returned to growth levels experienced prior to 
the 1997-98 crisis.  He enumerated Indonesia's significant successes 
in maintaining macroeconomic stability over the past two years. 
Inflation continues to decline, economic growth during the first 
half of the year rose to 6.1%, foreign exchange reserves stand at 
$51 billion, or 5.1 months of imports, the banking sector is strong 
and the Indonesian financial sector has largely weathered the 
current volatility in global financial markets.  On the expenditure 
side, strong commodity exports and growing domestic consumption have 
supported strong GDP growth.  On the production side, more robust 
growth in manufacturing and services have supported strong economic 
expansion.  BI expects strong growth to continue through the 
remainder of 2007 and into 2008. 
 
¶3. (SBU) BI officials also pointed to Indonesia declining external 
debt levels, fiscal consolidation and debt swap agreements with 
other Asian countries as signs of a more stable macroeconomic 
infrastructure.  The GOI has successfully consolidated its fiscal 
position through the elimination of fuel prices subsidies in 2005, 
and has maintained a fiscal deficit close to 1% of GDP since that 
time.  As a result, both the size and composition of Indonesia's 
public debt-to-GDP ratio have improved, allowing the government to 
repay its obligation to the IMF in the spring of 2007, ahead of 
schedule.  BI officials also noted that Indonesia has entered into a 
$12 billion swap arrangement with Japan, Korea and China to provide 
liquidity in the event of financial instability. (Note:  The Under 
Secretary pointed out that, given the interconnected nature of 
 
SIPDIS 
global financial markets, these arrangements may prove to be of 
limited use if all parties call on the funds at the same time. End 
note.) 
 
¶4. (SBU) Deputy Governor Banking Policy and Financial System 
Stability Muliaman D. Hadad described BI's effort to improve the 
formal arrangement for managing economic and financial crises and 
the central bank's effort to prevent large-scale crises from 
occurring in the future.  On crisis management, BI has worked 
closely with the Ministry of Finance and other relevant GOI agencies 
to delineate clearly the responsibility of each body in the event of 
a crisis.  This work has included singing an MOU between BI and the 
GOI to provide legal standing to these arrangements and the 
formation of a financial stability forum, which meets regularly at 
both senior- and working-levels.  BI officials report that this 
apparatus functioned well during the recent global market 
instability. 
 
¶5.  (SBU) On crisis prevention, BI has focused on building strong 
banking institutions and financial system integrity as well as 
developing an early warning system to signal impending financial 
sector vulnerabilities.  According to Deputy Governor Hadad, the 
1997-98 crisis revealed governance weaknesses across Indonesia's 
financial institutions, particularly around related party lending. 
As a result, BI has focused on improving the risk management and 
governance capacity of Indonesian banking institutions.  BI also is 
in the process of improving the competitive environment in the 
Indonesian banking sector.  Indonesia's banking sector is highly 
concentrated, with the 10 largest institutions accounting for the 
majority of banking sector assets.  At the same time, Indonesia has 
a large number of very small, unsophisticated banking institutions 
 
JAKARTA 00002609  002 OF 002 
 
 
with limited risk management capacity.  According to Hadad, BI's 
banking architecture reforms are focused on improving competition 
among large players while consolidating Indonesia's smaller and 
weaker institutions. 
 
¶6. (U) In an effort to develop Indonesia's financial sector 
infrastructure, BI is promoting the creation of a domestic 
debt-rating agency.  BI officials also stated that BI is considering 
undergoing an International Monetary Fund Financial Sector 
Assessment Program to develop a blueprint for strengthening and 
deepening the financial sector.  Finally, BI is working to improve 
the financial education of depositors and investors in an effort to 
empower the Indonesian population.  BI is in the process of 
developing a dispute settlement mechanism to respond to consumer 
complaints as well as a mediation process that can resolve these 
consumer disputes outside of the court system. 
 
BI Seeks U.S. Assistance to Build Supervisory Capacity 
--------------------------------------------- -------- 
 
¶7. (U) BI thanked the United States for providing training for its 
supervisory staff in the post-crisis years.  The Federal Deposit 
Insurance Corporation, the Federal Reserve Bank of New York, and the 
Board of Governors of the Federal Reserve System have provided BI 
staff with significant training in risk-focused supervision. 
However, in an effort to achieve central bank's goal of improving 
the expertise of supervisory staff, Hadad requested additional 
assistance from the supervisory authorities in the United States. 
Deputy Governor Hadad believes Indonesia needs to accelerate 
supervisory training and reforms in light of ongoing innovation in 
the financial sector, the need to adopt international accounting 
standards, and the need to prepare for the introduction of Basel II 
capital standards. 
 
Under Secretary Applauds BI on Bank Reform, Stability 
--------------------------------------------- -------- 
 
¶8. (U) Under Secretary Jeffery congratulated BI on its significant 
progress in improving the soundness of the financial sector and 
promoting macroeconomic stability in Indonesia.  The Under Secretary 
pointed to the high quality of BI's staff, the central bank's newly 
won independence and the strength of BI's regulatory approach as 
very positive developments. BI officials were particularly 
interested in the Under Secretary's views on the recent difficulties 
in the subprime mortgage market in the United States and the U.S. 
view on the seriousness of the climate change issue. 
 
¶9. (U) U/S Jeffery cleared on this cable. 
 
HUME