VZCZCXRO5076
RR RUEHCHI RUEHCN RUEHDT RUEHHM
DE RUEHJA #3247/01 3300854
ZNR UUUUU ZZH
R 260854Z NOV 07
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 7166
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHKO/AMEMBASSY TOKYO 1172
RUEHBJ/AMEMBASSY BEIJING 4517
RUEHBY/AMEMBASSY CANBERRA 1629
RUEHUL/AMEMBASSY SEOUL 4306
RUEAIIA/CIA WASHDC

UNCLAS SECTION 01 OF 03 JAKARTA 003247 
 
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: INDONESIAN ECONOMIC GROWTH ACCELERATES, BENEFITS SLOW TO 
TRICKLE DOWN 
 
 
¶1. (SBU) Summary.  Indonesia's GDP expanded a stronger than expected 
6.5% year-on-year (y-o-y) during the third quarter of 2007 on robust 
domestic demand and a higher investment rate.  Growth in the 
agriculture and service sectors outperformed the expansion of 
manufacturing activity. Despite more rapid economic growth, there is 
little evidence that the standard of living of the majority of 
Indonesians is improving at a meaningful rate.  The outlook for job 
growth remains weak and the incidence of poverty high.  If the 
current government's economic policy mix cannot generate jobs, 
reduce poverty and improve the standard of living for average 
Indonesians, pressure for policy changes with a more immediate 
impact are likely to mount.  End Summary. 
 
Domestic Consumption Fuels Stronger Growth 
------------------------------------------ 
 
¶2. (U) Indonesia's GDP expanded at a faster than expected pace 
during the third quarter of 2007, jumping 6.5% (y-o-y).  Strong 
domestic demand and a higher investment rate supported the rapid 
growth.  Government consumption also rose more quickly than in 
previous quarters, increasing 6.5% (y-o-y), in response to 
Government of Indonesia's (GOI) effort to expand spending during the 
second half of 2007.  Up to October, however, 2007 budget 
realization still shows Rp 17 trillion ($1.8 billion) surplus, due 
to slow implementation of both central and local government 
spending.  Export growth continued albeit at a slower pace than the 
first half of the year and considerably slower than rates in early 
¶2006.  Exports of goods and service expanded 7.8% (y-o-y) during the 
quarter, while imports rose 8.1 % over the same period.  Strong 
investment, consumption, and import growth (a large portion of which 
is intermediate goods) indicate continued strong growth momentum 
through the end of the year. 
 
--------------------------------------------- ----- 
Table 1:  Real GDP Growth, 2006-2007, Year-on-Year 
--------------------------------------------- ----- 
                       2006   2007   2007   2007 
                        Q4     Q1     Q2     Q3 
--------------------------------------------- ----- 
Private Consumption     3.8    4.5    4.7    5.3 
 
Government Consumption  2.2    4.3    3.8    6.5 
 
Fixed Capital Formation 8.2    7.5    6.9    8.8 
 
Exports of Goods and 
  Services      6.1    8.9    9.8    7.8 
 
Imports of Goods and 
  Services      9.7    8.4    7.2    8.1 
--------------------------------------------- ----- 
GDP                     6.1    6.0    6.3    6.5 
--------------------------------------------- ----- 
Source: Central Bureau of Statistics 
 
Agriculture, Services Expand Rapidly 
------------------------------------ 
 
¶3. (U) On the production side, the agriculture sector expanded 8.9%, 
following less than 1.0% (y-o-y) growth in the sector during the 
first half of the year.  Analysts attribute the pick up in 
agricultural activity to rapid growth in palm oil plantations. 
Growth in services continued to dominate other sectors, with growth 
in the trade/hotel/restaurant, transportation/communications, and 
financial services sectors comprising over 40 percent of total GDP 
expansion.  Manufacturing growth continued to lag most other 
sectors, with manufacturing activity expanding just 4.5% (y-o-y) 
during the quarter. 
 
¶4. (U) Bank lending continued to expand, rising over 22% 
year-to-date according to Bank Indonesia (BI) officials.  However, a 
large share of the growth in lending is concentrated in the 
capital-intensive natural resource sector.  According to Bank 
Indonesia data, credit growth to the mining sector rose 75% during 
the January-to-June period.  In contrast, lending to labor-intensive 
 
JAKARTA 00003247  002 OF 003 
 
 
manufacturing firms was much slower, increasingly only 11% over the 
same period.  The spread between lending and deposit rates is still 
high. 
 
--------------------------------------------- ---------- 
Table 2: 2007 3Q GDP Growth by Industry (percent) 
--------------------------------------------- ---------- 
                                  Growth       Share 
                                   Rate       GDP Grow. 
 
Agriculture/Livestock/Forestry 
        and Fishery                 8.9         20.0 
Mining and Quarrying                1.8          3.1 
Manufacturing                       4.5         18.5 
Electricity/Gas/Water              11.7         1.5 
Construction                        7.5          7.7 
Trade/Hotel/Restaurant              6.9         18.5 
Transport/Communication            12.5         12.3 
Financial/Bus. Service              8.0         10.8 
Services                            5.7          7.7 
--------------------------------------------- ---------- 
GDP                                 6.5        100.0 
--------------------------------------------- ---------- 
Note:  Share of GDP Growth (Share GDP Grow.) 
Source:  Central Bureau of Statistics 
 
Average Standard of Living Slow to Improve 
------------------------------------------ 
 
¶4. (U) Despite more rapid economic growth, there is little evidence 
that the standard of living of the majority of Indonesians is 
improving at a meaningful rate.  While nemployment has trended 
downward this year, the ate of decline lags the rate of economic 
expansin.  According to the Coordinating Ministry for Ecoomic 
Affairs, the open unemployment rate droppedslightly from 11.1% in 
February 2006 to 10.6% in ebruary 2007.  However, the rate of 
unemploymenthas failed to return to its 2003 level of 9.6%, an 
remains among the highest in the region.  (Note Unemployment 
statistics in Indonesia do not accrately reflect a large informal 
sector.) 
 
¶5. (U The outlook for job growth is also weak.  Similarto bank 
lending, much of the large-scale foreigndirect investment (FDI) innally 
generated fu"n*w" jobs.  Fo  example, BP is investing $6.8 billion 
in a liquffied natural gas plant in Papua, but the plant wilQ 
generate only 400-500 long-term jobs.  In contrast, a recent $1 
billion Intel investment in Vietnmm will generate roughly 4,000 
jobs.  Intel has as"o invested $3.3 billion in Malaysia and $1.5 
billion in the Philippines, creating 10,600 jobs and ,(000 jobs, 
respectively.  Increasingly intense regional competition for FDI 
means Indonesia must ipprove its investment climate in both absolute 
an  relative terms to attract new jobs. 
 
Poverty Reaains High 
-------------------- 
 
¶6. (U) The incd ence of poverty in Indonesia also remains high.  The 
portion of the population living under the offccial poverty line 
($1.55 a day) dropped to 16.6%f"rom 17.8% from March 2006 to March 
2007, reversnng the poverty rate rise that occurred during prevo*us 
12 months.  Nevertheless, World Bank estimates indicate that over 
45% of the population still lives on less than $2 a day, meaning a 
huge portion of the population remains extremely vulnerable.  In 
line with this trend, income inequality in Indonesia has worsened 
over the past ten years, suggesting wealthy Indonesian's are gaining 
the most from more robust economic growth and macroeconomic 
stability.  The World Bank's estimate of Indonesia's Gini 
Coefficient moved from 31.0 to 37.6 over the period 1999 to 2007. 
(Note:  The Gini Coefficient ranges from zero, where all households 
have the same income, to 100, where one individual earns all the 
income of the country).  Moreover, the World Bank recently reported 
that nominal wage increases in Indonesia have failed to keep pace 
with inflation for the past two years. 
 
 
JAKARTA 00003247  003 OF 003 
 
 
¶7. (SBU) Because so many Indonesians live at or near the poverty 
line, the high prices of staple products, such as rice and cooking 
oil, have a significant negative impact on household incomes. 
Although the price of rice has stabilized in recent months, it 
remains historically high due to poor harvests and government 
restrictions on rice imports.  The lack of investment in irrigation 
equipment in recent years keeps farmers in many areas dependent on 
weather patterns for rice production.  Moreover, although the GOI 
has loosened restrictions on rice imports, some limitations remain. 
The price of cooking oil also has increased in recent years due to 
soaring global demand for palm oil.  While the government has tried 
to manage price increases through export taxes, these policies have 
been largely ineffective to date, further straining the limited 
resources of poor families. 
 
Poverty Persistence May Prompt Policy Shift 
------------------------------------------- 
 
¶8. (SBU) Indonesia's macroeconomic outlook remains positive, with 
more stable prices, a stable currency, GDP growth expected to range 
between 6-7% for the next 12 months, improved investment rates, and 
modest job growth.  These positive trends are the result of prudent 
monetary and fiscal policies of Bank Indonesia and the GOI's strong 
economic team.  Yet, despite five quarters of GDP growth at or in 
excess of 6.0%, the number of people living at or near the poverty 
line remains high and standards of living among the majority of 
Indonesians have been slow to improve.  The pressure of higher 
inflation remains due to high oil prices.  If the current 
government's economic policy mix cannot generate jobs, reduce 
poverty and improve the standard of living for average Indonesians, 
pressure for policy changes with a more immediate impact are likely 
to mount.  While significant policy changes in the near term are 
unlikely, some analysts have raised concerns that the government 
will direct lending or relax supervisory standards in order to spur 
credit expansion in labor-intensive industries, potentially 
undermining the health of the country's banks. 
 
HUME