VZCZCXRO7897
RR RUEHCHI RUEHCN RUEHDT RUEHHM
DE RUEHJA #3074/01 3091056
ZNR UUUUU ZZH
R 051056Z NOV 07
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 6919
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHKO/AMEMBASSY TOKYO 1060
RUEHBJ/AMEMBASSY BEIJING 4447
RUEHBY/AMEMBASSY CANBERRA 1493
RUEHUL/AMEMBASSY SEOUL 4271
RUEAIIA/CIA WASHDC

UNCLAS SECTION 01 OF 04 JAKARTA 003074 
 
SIPDIS 
 
SIPDIS 
 
DEPT FOR EAP/MTS AND EB/IFD/OMA 
TREASURY FOR IA-SETH SEARLS 
SINGAPORE FOR SUSAN 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 AUGUST - 
OCTOBER 2007 
 
 
¶1. Summary.  Inflation was higher for September and October due to 
seasonal factors including the Islamic fasting month of Ramadhan and 
Eid holiday.  Bank Indonesia (BI) kept its policy rate steady in 
view of volatile markets and inflationary pressure.  On July 31, 
Government of Indonesia (GOI) announced the biggest privatization 
since 1995 of the second largest state-owned Bank Negara Indonesia 
(BNI) which raised Rp 8.1 trillion ($890 million).  GOI bond 
auctions on September and October raised a total of Rp 16.45 
trillion ($1.8 billion) in funds.  GOI received Rp 799 billion ($88 
million) from debt swap for its 16-year bonds yielding at 9.79%.  On 
September 12, the Parliament approved the GOI's plans to 
recapitalize two state firms tasked with helping small-and-medium 
enterprises (SMEs) in obtaining loan financing.  On October 9, the 
Parliament approved the GOI's 2008 state budget, with a deficit of 
1.7% of GDP and economic growth of 6.8%.  Moody's Investors Service 
upgraded Indonesia's credit ratings and foreign currency long-term 
debt and foreign currency long-term deposit ratings of 11 Indonesian 
banks.  Standard and Poor's Ratings Services affirmed its ratings on 
Indonesia with a stable outlook.  This cable uses and exchange rate 
of 9,103 per dollar.  End summary. 
 
Rising Inflation from Holiday Season 
------------------------------------ 
 
¶2.  On November 1, the Central Bureau of Statistics (BPS) announced 
it recorded 0.79% inflation in October, bringing the year-on-year 
(YoY) inflation rate to 6.88%.  It eased slightly compared to 6.95% 
logged in September.  Within analysts' expectations, inflation was 
relatively high for these two months as demand for food products and 
transportation picked up.  The Eid holiday celebrations marking the 
end of fasting month Ramadhan fell in mid-October this year.  Core 
inflation went up by 0.8% month-on-month (MoM), and 6.13% YoY in 
October, compared to September's 0.7% and 6.03% respectively. 
 
--------------------------------------------- - 
Table 1: Consumer Price Inflation Components 
         September - October 2007 
--------------------------------------------- - 
Component              September    October 
                      MoM    YoY   MoM    YoY 
--------------------------------------------- - 
Foodstuffs           1.81   12.99  1.87  12.64 
Prepared food, 
Beverages, tobacco   0.45    6.82  0.51   6.67 
Housing, water, 
electric, fuel       0.18    5.22  0.21   5.18 
Clothing             1.22    5.39  2.05   6.49 
Health               0.44    3.16  0.45   5.14 
Education, 
recreation/sports    1.70    8.57  0.21   8.69 
Transportation, 
communication and 
financial services   0.07    1.18  0.47   1.19 
--------------------------------------------- - 
Total                0.80    6.95  0.79   6.88 
--------------------------------------------- - 
 
Core Inflation (1)   0.70    6.03  0.80   6.13 
 
Note: 
(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) 
 
Interest Rate Cut to 10.75% 
--------------------------- 
 
¶3. Amid volatile markets and inflationary pressure connected with 
the religious holidays, BI maintained its policy rate at 8.25% at 
October 8's monetary policy meeting, the fourth month in a row of 
steady rates.  "It is not the right time to cut the interest rate. 
It would be better to hold it at the current level," Senior Deputy 
Governor Miranda Goeltom said.  "We expect to keep it steady for now 
while assessing the situation and will make the decision at the 
right time on when interest rates should fall," she added as quoted 
 
JAKARTA 00003074  002 OF 004 
 
 
by Reuters.  BI is maintaining its 2007 year-end inflation forecast 
of about 6%.  Analysts expect one more rate cut in the remainder of 
the year to bring the key BI rate to 8%, as inflation is likely to 
moderate following the fasting month of Ramadhan and the Islamic 
holiday season. 
 
BNI Bank Shares Sold - 26% 
-------------------------- 
 
¶4. In the first major privatization for years, the State Minister 
for State Enterprises announced on July 31 that the sale of a 26% 
stake in second largest state-owned Bank Negara Indonesia (BNI) 
raised Rp 8.1 trillion ($890 million).  The share sale, via a 
secondary public share offering, was the biggest privatization since 
the government sold a minority stake in telecommunications giant 
Telkom in 1995.  "The transaction has been successfully accomplished 
although the market has not been really conducive.  It reflects 
investor confidence in the Indonesian economy, the banking sector 
and BNI's prospects in the future," the office said in a statement, 
according to Reuters.  The government plans to use around half the 
funds to help plug the state budget deficit and the rest to 
strengthen the bank's capital base.  The bank, which has a strong 
presence in corporate and retail banking, had total assets of about 
Rp 175 trillion ($19 billion) in the first quarter of 2007. 
 
August, September Long-Term Bond Auctions 
----------------------------------------- 
 
¶5. The GOI raised a total of Rp 9.5 trillion ($1 billion) from bond 
auctions on August 28.  It sold Rp 3.5 trillion ($385 million) of 
21-year bonds at a 10.29% yield and Rp 6 trillion ($659 million) 
worth of 15-month zero-coupon papers at an average yield of 8.24%. 
The Ministry of Finance's Director General of Debt Management Rahmat 
Waluyanto said that the auction drew a good response from the 
market.  He suggested that the impact of the US sub-prime credit 
crisis on Indonesia's financial markets is gradually waning.  On 
September 29, the GOI raised another Rp 6.95 trillion ($764 
million), Rp 3.45 trillion ($379 million) from auctioning 21-year 
bonds at an average yield of 9.9%, and Rp 3.5 trillion ($385 
million) from 11-year bonds bonds yielding 9.4%. 
 
GOI Swaps Debt 
-------------- 
 
¶6. The Ministry of Finance received Rp 799 billion ($88 million) in 
bids from investors who wanted to swap shorter-maturity bonds for 
GOI's 16-year bonds yielding at 9.79%.  Investors submitted a total 
of Rp 1.46 trillion ($160 million) in bids at the auction.  The 
government has been trying to lengthen its debt maturity profile by 
offering investors the opportunity to exchange shorter-term bonds 
for longer-dated paper to reduce the burden of maturing paper in the 
next five years.  So far this year, the department has exchanged a 
total of Rp 15.2 trillion ($2 billion) of short-dated government 
bonds in longer-dated paper. 
 
Parliament Approves 2008 State Budget 
------------------------------------- 
 
¶7. On October 9, the Parliament approved the GOI's 2008 state 
budget, which proposes a larger deficit of 1.7% of GDP compared with 
1.5% this year and economic growth of 6.8% against 6.3% this year. 
Total budget revenue for 2008 is set at Rp 781.4 trillion ($86 
billion) or 18.1% of GDP while total expenditure is set at Rp 854.7 
trillion ($94 billion), resulting in a budget deficit of Rp 73.3 
trillion ($8 billion) or 1.7% of GDP.  During the plenary session, 
Finance Minister Sri Mulyani said that, "The government is 
optimistic it can achieve the 2008 economic growth, supported by an 
expected improvement in consumer spending and higher investment in 
line with the improving investment climate." 
 
¶8. The 2008 state budget assumes inflation at 6%, lower than the 
government's forecast of 6.5% for this year, while the rupiah 
exchange rate is set at 9,100 to the US dollar compared to 9,050 in 
this year's budget.  The three-month Bank Indonesia Certificate 
(SBI) rate is projected to fall to 7.5% from 8% this year, while the 
oil price assumption is $60 per barrel, unchanged from this year. 
The parliament and the GOI also agreed on a dividend payment of Rp 
 
JAKARTA 00003074  003 OF 004 
 
 
26 trillion ($3 billion) by state-owned companies. 
 
Parliament Approves SOE Recapitalization 
---------------------------------------- 
 
¶9. The Parliament, on September 12, approved plans to recapitalize 
two state firms tasked with providing loan insurance to small and 
medium sized enterprises (SMEs).  According to the plan, the GOI 
will inject Rp 850 billion ($93 million) into Askrindo and the 
remaining Rp 600 billion ($66 million) into Perum Sarana 
Pengembangan Usaha to allow them to offer more loan insurance for 
banks in case their SME loans turn sour.  The scheme is part of 
GOI's efforts to aid the financing for SMEs, which employ the 
majority of the country's 100 million labor force.  Sahala 
Lumban-Gaol, deputy minister in the economic coordinating ministry 
told Reuters, "The aim is to increase the capability of the firms in 
providing guarantees on bank loans extended to SMEs."  Finance 
Minister Sri Mulyani Indrawati, in a parliamentary hearing on 
September 11, stated that SMEs (defined as those with annual sales 
of a maximum $15 million) play an important role in the economy. 
 
Moody's Upgrades Indonesia's Credit Ratings 
------------------------------------------- 
 
¶10. On October 18, Moody's Investors Service upgraded Indonesia's 
credit ratings, lifting the Indonesian government's foreign- and 
local-currency bond ratings to Ba3 from B1 and its foreign-currency 
bond ceiling to Ba2 from Ba3.  It said the outlook on all ratings is 
stable, citing progress in cutting its debt and ample foreign 
exchange reserves and trade surplus, which offer buffers against 
external shocks.  The move brings Moody's rating belatedly into line 
with rankings by both Standard and Poor's Ratings Services and Fitch 
Ratings.  Fitch, which has a positive outlook on its Indonesia 
grade, is still the most upbeat on the country. "Along with 
prolonged fiscal restraint and recurrent under-execution of regional 
and local level spending targets, exchange-rate appreciation has 
also assisted in reducing the government debt ratio from a high of 
100% of gross domestic product (GDP) in 2000 to an expected 34% in 
2008," Moody's lead analyst for Indonesia Aninda Mitra was quoted as 
saying. 
 
¶11. Moody's also raised the foreign currency long-term debt and 
foreign currency long-term deposit ratings of 11 Indonesian banks -- 
Bank Central Asia, Bank Danamon, Bank Internasional Indonesia, Bank 
Lippo, Bank Mandiri, Bank Negara Indonesia, Bank Niaga, Bank 
Permata, Bank Rakyat Indonesia, Bank Tabungan Negara and Pan 
Indonesia Bank. 
 
Standard and Poor's Affirms Ratings for Indonesia 
--------------------------------------------- ---- 
 
¶12. On September 25 Standard and Poor's Ratings Services affirmed 
its ratings on Indonesia with a stable outlook, stating that the 
ratings are underpinned by continued improvements in the nation's 
debt and external liquidity positions.  "Despite a modest rise in 
the central government deficit, we expect the government to adhere 
to fiscal discipline," said analyst Sani Hamid. The current account 
surplus continued to grow and there were steady FDI inflows and 
portfolio investments, he added.  S&P has 'BB-/B' foreign currency 
and 'BB+/B' local currency ratings on Indonesia. 
 
--------------------------------------------- ------ 
Table 2:  Selected Economic, Financial, and Trade Statistics, July - 
October 2007 
--------------------------------------------- ------ 
                          Jul    Aug    Sep    Oct 
--------------------------------------------- ------ 
CPI Inflation (YoY)       6.06   6.51   6.95   6.88 
 
CPI Inflation (MoM)       0.72   0.75   0.80   0.79 
 
Rp/USD Exch. rate(1)     9,186  9,410  9,137  9,103 
 
30-day SBI rate (1)       8.25   8.25   8.25   8.25 
 
Foreign Res. ($ bn)(1)    51.9   51.4   52.9 
 
 
JAKARTA 00003074  004 OF 004 
 
 
JSX Composite Index(1)   2,349  2,194  2,359  2,643 
 
Exports ($ billion)        9.8    9.6    9.5 
 
Percent change (YoY)      10.5    7.8    7.6 
 
Imports ($ billion)        6.3    6.9    6.8 
 
Percent change (YoY)      16.1   16.9   17.4 
 
Trade Balance              3.5    2.7    2.7 
 
Source: Bank Indonesia, BPS, JSX 
(1) End of period 
 
HUME