VZCZCXRO0415
RR RUEHCHI RUEHDT RUEHHM
DE RUEHJA #2745/01 2710336
ZNR UUUUU ZZH
R 280336Z SEP 07
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 6482
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHKO/AMEMBASSY TOKYO 0876
RUEHBJ/AMEMBASSY BEIJING 4350
RUEHBY/AMEMBASSY CANBERRA 1274
RUEHUL/AMEMBASSY SEOUL 4223
RUEAIIA/CIA WASHDC

UNCLAS SECTION 01 OF 03 JAKARTA 002745 
 
SIPDIS 
 
SIPDIS 
 
DEPT FOR EAP/MTS, EB/IFD/OMA 
TREASURY FOR IA-BAUKOL 
SINGAPORE FOR TREASURY-BAKER 
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 KMCA KCOR ID
SUBJECT: GENERALLY POSITIVE ASSESSMENT OF INDONESIA'S ECONOMY 
PROVIDED BY KEY OFFICIALS 
 
REF: JAKARTA 13559 
 
¶1. Summary:  Several key economic officials proviced a generally 
positive assessment overall of Indonesia's economy.  Coordinating 
Minister for the Economy Boediono chaired a high-level briefing for 
donors and the private sector on September 25, noting that 
Indonesia's economy has grown more than 6% for the past four 
quarters.  Bank Indonesia Senior Deputy Governor Miranda Goeltam 
said that monetary and banking sector reforms are improving 
stability.  Indonesia's interest rates are still the highest in the 
region attracting portfolio investment.  A new investment survey of 
businesses shows a perception of less corruption overall.  Finance 
Minister Mulyani continues a vigorous reform program, replacing 
1,300 customs officials at Jakarta's Tanjung Priok, Indonesia's 
largest port.  End Summary. 
 
¶2. Coordinating Minister for the Economy Boediono held a meeting for 
donor and private sector on September 25 to provide an update on the 
macroeconomy, financial sector and investment.  Finance Minister Sri 
Mulyani Indrawati, Senior Bank Indonesia Deputy Governor Miranda 
Goeltam (financial and banking sector), State Minister for 
Administrative Reform Taufiq Effendi (regulatory issues) and 
Director of the Institute for Economic and Social Research at the 
University of Indonesia Dr. Chatib Basri (investment survey) also 
gave presentations. 
 
Momentum Building for Stronger Growth 
------------------------------------- 
 
¶3. (U) Coordinating Minister for Economic Affairs Boediono opened 
the forum with a review of Indonesia's strong macroeconomic 
performance over the past year.  He noted that the Indonesian 
economy grew more than 6.0% during each of the past four quarters, 
with the non-oil economy expanding 7.0% over the first half of 2007. 
Commodity exports and domestic consumption continue to drive growth. 
 Investment rates have also picked up considerably in 2007. 
Investment approvals rose 145% during the first half of the year 
compared to the same period last year. 
 
¶4. Boediono predicted that the Indonesian annual economic growth 
rates would exceed 7.0% by 2010, on the back of continued strong 
world demand for Indonesian commodities, increased domestic 
spending, and new infrastructure capacity set to come on line in 
¶2008.  Boediono also expects continued progress on investment 
climate reforms and a low interest rate environment to spur growth. 
In addition, the GOI plans to expand spending on infrastructure 
significantly in the coming years, further reducing supply-side 
constraints to growth.  Boediono downplayed the impact of a global 
economic slowdown on Indonesia's export performance citing the 
Indonesia's well-diversified export product and destination mix. 
 
¶5. Boediono reported renewed momentum in the fight against poverty 
and unemployment.  According to GOI data, the rate of open 
unemployment in Indonesia declined form 11.2% in November 2005 to 
9.2% in February 2007.  Boediono expects the rate to fall to the 
8-9% range by the end of 2008.  The incidence of poverty also fell 
from 2006 to 2007.  However, the drop in 2007 followed a rise in the 
rate of poverty during the previous year.  Nevertheless, in 
recognition that poverty remains a significant problem in Indonesia, 
Boediono announced plans for a significant increase in spending on 
community empowerment and poverty reduction programs in 2008.  The 
GOI has also attempted to rationalize price stability programs for 
rice, sugar and fuel by easing import restrictions and targeting 
price subsidies to the poor, in an effort to relieve pressure on 
households with low incomes. The GOI expects inflation rates to drop 
to the regional average of 3-4% over the medium term. 
 
Monetary and Banking Sector 
Reforms Yield Results 
--------------------------- 
 
¶6. Bank Indonesia Senior Deputy Governor Miranda S. Geoltom 
described BI's success in maintaining price stability in recent 
years.  Price levels in Indonesia continue to fall, with volatility 
limited to the energy and food sector.  The Rupiah remains on an 
appreciating trend, despite the recent dip attributed to global 
financial turmoil.  Strong macroeconomic fundamentals, including 
 
JAKARTA 00002745  002 OF 003 
 
 
current account surpluses, a large pool of foreign exchange reserves 
and a manageable external debt burden have limited capital outflows 
during the recent global credit market slump.  While BI has moved 
the reference rate to down 450 basis points over the past year and a 
half, Indonesian interest rates are still the highest in the region, 
making Indonesia more attractive to foreign capital.  Miranda 
affirmed that BI is committed to maintaining a flexible exchange 
rate regime, intervening in the foreign exchange market only to 
smooth volatility. 
 
¶7.  BI's effort to strengthen Indonesia's banking sector has paid 
dividends. The Indonesian banking industry is well capitalized 
(industry capital asset ratio above 20%), profitable (industry 
return on assets 2.8%), highly liquid (industry ratio of government 
bonds to assets 26%), and healthy (industry nonperforming loans 
ratio 6.4%).  Skill levels among Indonesian bankers have improved, 
reducing the level of asymmetric information between banks and their 
clients.  However, risk aversion leftover from the financial crisis 
of the late 1990s has continued to suppress credit growth in 
Indonesia. While credit growth has begun to recover in recent years, 
the rate of growth of loans remains well below the pre-crisis rate. 
 
 
¶8.  As a result, BI is attempting to implement policies that 
encourage lending or "improve the bank intermediation function" 
while maintaining the integrity of the banking sector.  In line with 
the effort to promote lending activity, BI introduced policy changes 
in 2006 that eased rules for classifying certain types of credits 
such as shariah instruments, loans to SMEs and loans for disaster 
relief.  BI has also established a credit bureau, improved data 
collection, and facilitated meetings between banks and potential 
borrowers in order to improve information flows. 
 
Investment Survey 
----------------- 
 
¶9. Dr. Basri presented the results of the fourth investment climate 
monitoring survey (since 2005) of 589 firms in five metropolitan 
areas: Medan, Jabotabek, Semarang, Surabaya and Makassar.  The 
survey also interviewed 56 notary offices in depth on business 
start-up times.  Major conclusions: 
 
-- Perceptions of investment climate improved overall. 
 
-- Biggest perceived obstacles are macroeconomic instability, 
transportation, corruption and economic policy uncertainty. 
Perceptions of infrastructure quality, especially transportation and 
electricity have worsened since late 2005. 
 
-- The impact of economic shocks from higher fuel prices, inflation 
and interest rates has eased. 
 
Obstacles to Business: Corruption 
--------------------------------- 
 
¶10. The perceptions of corruption mostly showed improvement.  From 
the end of 2005 to 2007, those who cited central government 
corruption as an obstacle dropped from 47% to 43%; local government 
corruption dropped from 52% to 48%.  Both regional and national 
customs dropped from 36% to 33% and from 36% to 32% respectively. 
Central and government licenses and permits remained the same at 29% 
 Land procurement increased from 16% to 20%.  Import clearance time 
has improved from 7.6 days to 5.9 for the red lane, and from 6.1 to 
3.1 for the green lane.  Unfortunately, the percentage of those who 
say they never pay bribes has dropped: 19% said they never paid 
bribes in mid-2005 but only 9% in 2007.  Informal payments to 
government officials as a percentage of production costs declined to 
1.3% in 2007 from 1.7% in 2005. 
 
Small Tax Improvements 
---------------------- 
 
¶11. The value-added tax (VAT) refund as a percentage of the initial 
claim has increased from 80.3% to 83.9% from 2005 to 2007.  The time 
to process a VAT refund has decreased to 5.1 months from 6.3 in 
mid-2006.  However, more than half of the respondents reported they 
needed to make unofficial payments and negotiate with tax officials 
 
JAKARTA 00002745  003 OF 003 
 
 
to obtain a VAT refund.  In 2005, 65% of respondents reported VAT 
regulations as unclear, which improved to 43% in 2007.  Businesses 
are still required to file seven different types of tax returns each 
month, devoting 32 man days to the task, down from 41 man days in 
¶2005. 
 
Labor Issues: Mixed Picture 
--------------------------- 
 
¶12. In most areas the percentage of respondents experiencing labor 
problems declined: demands for wage increases, worker 
demonstrations, conflicts with labor unions and worker strikes. 
However social security problems increased from 6% in 2005 to 9% in 
¶2007.  Severance pay and lay-off procedures are still the biggest 
obstacles.  Concerns about overtime regulations, minimum wage, 
social security, foreign workers and government monitoring also 
increased.  The cost of handling labor problems as a percentage of 
total production cost is 4.1%, up from 3.7% in 2005. 
 
Starting a Business: From 80-86 Days 
------------------------------------ 
 
¶13.  One of the biggest unpleasant surprises of the briefing was the 
increase in the days to start a business from 80 in 2005 to 86 
calendar days in 2007, despite the GOI's efforts to reduce it 
eventually to 30 days.  The additional time was attributed to the 
delegation of authority to legalize limited liability companies to 
the provincial offices of the Ministry of Justice under Presidential 
Instruction (INPRES) No. 3/2006.  The provincial offices: 
 
-- Lack strong internal controls; 
-- Lack equipment and skilled information technology staff 
      to operate an online legalization system; 
-- Have low volume so cannot spread fixed costs resulting 
     in higher costs to the applicant; 
-- Required more face-to-face contact and thus corruption. 
 
In a follow-on presentation by State Minister for Administrative 
Reform Taufiq Effendi, Effendi said the Ministry of Justice and 
Human Rights was drafting a regulation to re-centralize the 
authority for establishing a business, taking it back from the 
provincial offices, and suggested 14 additional actions to speed up 
the process of starting a business.  On September 26, the 
International Finance Corporation (IFC) issued its "Doing Business" 
Report showing that Indonesia had moved up overall from position 135 
to 123.  However, the country still ranks below other regional 
economies. 
 
Bureaucratic and Civil Service Reforms 
-------------------------------------- 
 
¶14. Minister Mulyani discussed some of her priorities for 
bureaucratic reform: 
 
-- Tax and Customs Administration; 
-- Budget, Treasury and Debt Management; 
-- Business Process and Civil Service Performance. 
 
On tax administration, she is focusing on expanding the Medium and 
Small Taxpayer offices on the model of the successful Large Taxpayer 
Offices (LTO), which have improved customer service and reduced 
corruption.  "We want to change the way we serve the taxpayer," 
Mulyani said.  On Customs reform, Mulyani fired 1,300 customs 
officials at Jakarta's large port of Tanjung Priok, replacing them 
with 800 officials who had to pass a tough new exam, and have to 
satisfy mandatory codes of conduct.  On budget, treasury and debt 
management, Mulyani has this year introduced a Treasury Single 
Account, a primary dealers market, Treasury bill auctions and hopes 
to begin issuance of sharia sovereign bonds.  In her Ministry, she 
has also implemented key performance indicators for all positions 
and better remuneration and recruitment for important skills.  "I 
want to earn the trust of the public with better performance so they 
won't think we are wasting their money," she said. 
 
HEFFERN