VZCZCXRO4391
RR RUEHCHI RUEHCN RUEHDT RUEHHM
DE RUEHJA #3138/01 3170748
ZNR UUUUU ZZH
R 130748Z NOV 07
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 7017
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHKO/AMEMBASSY TOKYO 1096
RUEHBJ/AMEMBASSY BEIJING 4470
RUEHBY/AMEMBASSY CANBERRA 1535
RUEHUL/AMEMBASSY SEOUL 4286
RUEAIIA/CIA WASHDC

UNCLAS SECTION 01 OF 02 JAKARTA 003138 
 
SIPDIS 
 
SIPDIS 
 
DEPT FOR EAP/MTS AND EB/IFD/OMA 
TREASURY FOR IA-SSEARLS 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:  INDONESIA'S CAPITAL MARKETS WEATHERING TURMOIL 
 
 
¶1. Summary.  Dr. M. Chatib Basri, a well-respected macroeconomist, 
stated that Indonesia has weathered recent turmoil in global 
financial markets and is unlikely to face another significant 
financial crisis in the near term at a seminar on November 6.  Bank 
Indonesia (BI) Senior Deputy Governor Miranda S. Goeltom underscored 
the need to deepen capital markets.  Ministry of Finance (MOF) 
Fiscal Policy Agency Head Anggito Abimanyu noted that the Government 
of Indonesia (GOI) continues to strive to improve market monitoring 
and establish liquid, transparent, and orderly capital markets.  The 
MOF remains concerned about potential spillover from the subprime 
mortgage crisis in the United States and high oil prices.  Despite 
recent financial market turbulence, foreign investors have remained 
invested in Indonesian assets. 
 
Macroeconomic Outlook Strong, 
But Unemployment Persists 
---------------------------- 
 
¶2. On November 6, the United States-Indonesia Society (USINDO) 
hosted a seminar on "Capital Market Development:  What Does the 
Future Hold?" Prominent Indonesian policymakers and economists 
addressed and attended the forum.  Dr. M. Chatib Basri, an advisor 
to the government, respected macro-economist and University of 
Indonesia faculty member, observed that Indonesia has weathered 
recent turmoil in global financial markets and is unlikely to face 
another significant financial crisis in the near term.  Both the 
stock market and yield curve have returned to the levels witnessed 
prior to the onset of global credit market problems.  The Indonesian 
banking sector remains strong, foreign exchange reserves are high 
and the country has low levels of short-term foreign currency debt. 
He also emphasized Indonesia's strong macroeconomic outlook.  Basri 
believes that investment rates bottomed out in 2006 and will 
continue improve in the coming 12 months, albeit at a less than 
optimal pace.  Supporting this view are strong capital goods 
imports, increased electricity use and an increase in value-added 
tax (VAT) revenues. 
 
¶3. Dr. Basri noted that government statistics often underestimate 
the level of economic activity in Indonesia.  Most small businesses 
prefer to avoid government officials in an effort to escape official 
graft and bureaucratic red tape.  Basri also asserted that while 
domestic and international demand for Indonesian products is high, 
the economy suffers from significant supply side constraints, 
particularly in labor-intensive industries.  As a result, 
manufacturing and other labor-intensive industries have not 
responded to lower interest rates and the open unemployment rate 
remains high.  In order to remove these supply side constraints, the 
government needs to reform labor laws and to improve the investment 
climate.  He also noted that investment climate reforms are 
necessary -- but not sufficient -- conditions to attract investment. 
 Indonesian companies must also position themselves to become part 
of the supply network for global products, similar to India and 
Malaysia. 
 
Challenges Ahead for Bank Indonesia 
----------------------------------- 
 
¶4. BI Senior Deputy Governor Miranda S. Goeltom outlined the current 
challenges faced by monetary policy makers in Indonesia and 
underscored the need to deepen capital markets.  Despite Indonesia's 
positive economic outlook, Miranda believes Indonesian policymakers, 
particularly central bankers, must move cautiously in light of the 
large amount of uncertainty surrounding global capital markets.  The 
amount of losses and full market impact associated with the U.S. 
subprime mortgage debacle is still unknown.     Miranda expressed 
concern that a downturn in the United States could have both primary 
and secondary effects on Indonesia, through direct trade and trade 
with other US trading partners such as China and India.  Miranda 
also expressed concern about the effect of high oil prices on 
Indonesian inflation rates.  Because Indonesia produces and imports 
oil, the impact of higher oil prices on the Indonesian economy 
remains difficult to forecast. 
 
¶5. In Miranda's view, Indonesia needs to develop capital markets to 
smooth out potential volatility and channel funds more efficiently 
to the real sector.  Indonesian domestic capital markets have the 
lowest level of market capitalization in the region with the 
 
JAKARTA 00003138  002 OF 002 
 
 
exception of the Philippines.  With relatively underdeveloped 
capital markets, Indonesia is more vulnerable to changes in market 
sentiment.  In addition, without deep capital markets, Indonesia 
continues to rely on banks to finance most economic activity.  Yet 
Indonesian banks have focused the bulk of their lending in the 
capital-intensive natural resource sector, creating few jobs in the 
process.  She urged government policy makers to accelerate legal 
reforms and introduce incentives to initial public offerings and 
corporate bond issuance that would help spur growth in debt and 
equity instruments.  She also commended the Ministry of Finance's 
(MOF) efforts to create a more complete yield curve in Indonesia 
through Treasury bill auctions. 
 
MOF Focused on Capital Market Deepening 
--------------------------------------- 
 
¶6. MOF Fiscal Policy Agency Head Anggito Abimanyu, in a presentation 
entitled "Debt Financing and Deepening Capital Markets," described 
the GOI's efforts to improve market monitoring and establish liquid, 
transparent, and orderly capital markets.  The MOF now uses 
Bloomberg-based system to monitor Indonesian financial market 
developments on a real time basis.  The MOF can plot the impact of 
capital market developments on Indonesia's budget, including the 
effect on revenue, subsidies and the budget deficit.  The system 
also assess overall economic conditions in Indonesia, issuing a 
warning sign to indicate whether the operating environment is normal 
(green), cautious (yellow), or poor (red). 
 
¶7. On the fiscal policy side, Anggito highlighted the MOF's work to 
develop the T-bill market, which has allowed the GOI to expand its 
budget deficit and tap domestic financing sources, reducing the 
external component of the national debt.  Anggito also noted that 
the government securities market is increasingly diverse, with a 
range of long-term and short-term instruments.  The MOF has fully 
embraced a market-based, disciplined debt management strategy, 
communicating regularly with the market participants.  Looking 
forward, the GOI also hopes to issue sharia bonds next year in an 
effort to take advantage of demand for GOI debt in the Middle East. 
The MOF is also preparing to reduce taxes for initial public 
offerings in an effort to boost equity market development. 
 
¶8. Anggito noted that the MOF is closely monitoring the current 
instability in capital markets, and remains concerned about 
potential spillover from the subprime mortgage crisis in the United 
States and high oil prices.  While recent global market instability 
has increased volatility of foreign capital markets, foreigner 
portfolio investors have not retreated significantly from Indonesian 
markets. 
 
HUME