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UNCLAS SECTION 01 OF 06 JAKARTA 000038 
 
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 NOVEMBER - 
DECEMBER 2007 
 
 
¶1. Summary.  Indonesia's December inflation came in lower on a 
year-on-year (YoY) basis as consumer demand eased after the Muslim 
festive season.  Bank Indonesia (BI) cut its interest rate by 25 bps 
to 8% at its December board meeting after keeping it steady for four 
months ending in November.  Indonesia's GDP expanded a stronger than 
expected 6.5% YoY during the third quarter of 2007 on robust 
domestic demand and a higher investment rate.  The Government of 
Indonesia (GOI) and market observers assume an overall positive 
growth picture in 2008, despite high global crude oil prices, and 
economic sluggishness following the U.S. subprime mortgage crisis. 
The GOI raised a total of Rp 6.6 trillion ($700 million) from its 
fourth quarter bond auctions (October-December), concluding its 2007 
budget target.  The GOI bought back Rp 1.2 trillion ($129 million) 
worth of bonds maturing 2008-2012 on a December 13 auction.  BI and 
the Ministry of Finance (MOF) on December 27, 2007 signed a MOU 
launching an electronic banking system to support government budget 
management.  Banks reported strong earnings for 3Q 2007.  On 
December 27, 2007 Malaysia's investment arm Khazanah announced the 
merger of its two Indonesian banks, Lippo and Niaga to comply with 
BI's single presence policy.  Newly merged Indonesia Stock Exchange 
(combined from the Jakarta and Surabaya Stock Exchanges) commenced 
trading on December 13.  Indonesia's sole state-owned toll road 
operator raised $380 million from an IPO.  The Agency for the 
Rehabilitation and Reconstruction of Aceh and Nias (BRR) handed over 
the 100,000th house constructed after the December 2004 tsunami 
disaster.  This cable uses and exchange rate of 9,419 per dollar. 
End summary. 
 
Rising Inflation from Holiday Season 
------------------------------------ 
 
¶2.  The Central Bureau of Statistics (BPS) recorded 1.1% inflation 
in December, bringing the year-on-year (YoY) inflation rate to 6.6%. 
 The December YoY inflation rate was slightly lower than the 6.7% 
recorded in November. The slowdown in price increases was attributed 
mainly to lower prices for foodstuffs.  It was the third consecutive 
month that headline inflation slowed from the 2007 peak reached in 
September.  Core inflation went up by 0.68% month-on-month (MoM), 
and 6.29% YoY in December, compared to November's 0.43% and 6.25% 
respectively. 
 
--------------------------------------------- - 
Table 1: Consumer Price Inflation Components 
         November - December 2007 
--------------------------------------------- - 
Component              November     December 
                      MoM    YoY   MoM    YoY 
--------------------------------------------- - 
Foodstuffs           0.04   11.96  2.47  11.26 
Prepared food, 
Beverages, tobacco   0.43    6.63  0.91   6.41 
Housing, water, 
electric, fuel       0.12    4.99  0.63   4.88 
Clothing             1.66    7.50  0.99   8.42 
Health               0.26    4.98  0.41   4.31 
Education, 
recreation/sports    0.11    8.77  0.12   8.83 
Transportation, 
communication and 
financial services  -0.27    1.13  0.22   1.25 
--------------------------------------------- - 
Total                0.18    6.71  1.10   6.59 
--------------------------------------------- - 
 
Core Inflation (1)   0.43    6.25  0.68   6.29 
 
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 8.0% 
------------------------- 
 
¶3. Bank Indonesia (BI) trimmed its benchmark interest rate by 25 
 
JAKARTA 00000038  002 OF 006 
 
 
basis points to 8.0% at its December 6, 2007 Board meeting, 
delivering its 14th cut since 2006 following lower-than-expected 
inflation on November.  BI had kept its benchmark interest rate 
steady the previous four months at 8.25% due to concerns about the 
impact of unprecedented global crude oil prices. 
 
Indonesia Recorded Q3 Growth at 6.5% 
------------------------------------ 
 
¶4. On November 15, 2007 the Central Statistics Bureau (BPS) reported 
that the economy grew a faster-than-expected 6.5% YoY in 3Q 2007, on 
track for its fastest growth in more than a decade in 2007, mainly 
due to strong commodity exports and low interest rates.  Compared to 
the second quarter, the economy expanded by 3.9% to Rp 2,901.3 
trillion ($308 billion), with a pick-up in fixed investment during 
the three months to September.  Exports and investment rose by 7.8% 
and 8.8% YoY respectively in the third quarter, topping overall 
growth, but consumer spending also showed a healthy 5.3% rise, 
largely driven by a sharp fall in borrowing costs.  Transport and 
telecommunications led among industrial sectors with growth of 
almost 12.5% YoY in the third quarter.  "The agriculture sector 
contributed the largest portion to economic growth in the third 
quarter," said Rusman Heriawan, chairman of BPS.  Heriawan said the 
sector grew 10.2% from the previous quarter and 8.9% YoY. 
 
¶5. In November 2007, the MOF stated that the GOI hoped to accelerate 
budget spending in the fourth quarter 2007 to meet its budget target 
of a 1.5% surplus over GDP - pushing funds into the economy in the 
final quarter to further boost economic activity.  The GOI posted a 
budget surplus of Rp 17.6 trillion ($1.9 billion) in the first 10 
months of 2007.  As of October, the government had spent Rp 506.6 
trillion ($53.8 billion) against targeted full-year spending of Rp 
752.4 trillion ($79.9 billion), while revenue stood at Rp 524.3 
trillion ($55.7 billion) compared to a full-year target of Rp 694.1 
trillion ($73.7 billion).  The MOF estimated full-year growth at 
around 6.2-6.3%, the country's fastest economic growth rate in 11 
years.  The economy expanded 5.5% in 2006.  The MOF also forecast 
the rupiah would average 9,170 per dollar in the fourth quarter and 
9,125 per dollar for the full year.  The Investment Coordinating 
Board (BKPM) announced on December 19, 2007 that direct investment 
hit a 40-year record high of Rp 125.94 trillion ($13.4 billion) in 
the first nine months of 2007, represented a 169.02% rise compared 
to 2006. 
 
Positive Forecasts for 2008 
--------------------------- 
 
¶6. The World Bank remained strongly upbeat in its projection for 
Indonesia's 2008 growth, in line with other East Asian economies. 
It expects Indonesia's economy to grow steadily at least through to 
the end of 2008 at 6.4%, following the estimated 6.3% in 2007.  The 
economy could grow by as much as 8% if the government managed to 
attract more foreign investment to improve infrastructure, World 
Bank economist William Wallace told reporters.  The bank's East Asia 
and Pacific lead economist Milan Brahmbhatt said that Indonesia 
would be able to weather short-term global volatility arising out of 
the US sub-prime mortgage crisis and the renewed surge in oil prices 
through increased domestic consumption and investment, which would 
continue to sustain growth. 
 
¶7. In a November 21, 2007 interview with Dow Jones, Coordinating 
Minister for the Economy Boediono stated that the growth target 
range of 6.5% and 7% in 2008 is still achievable despite signs of a 
global slowdown, adding that growth would be driven by exports and 
domestic expansion.  He underlined the need for more spending on 
infrastructure in order to maintain competitiveness.  In an 
interview with Bloomberg, he said that "From the supply side, it is 
key to keeping inflation under control.  I think the main issue here 
is how to beef up our capacity to prepare good projects." 
 
¶8. Finance Minister Sri Mulyani is optimistic that Indonesia could 
outperform its own projection for growth in 2008. "We are aiming for 
higher than 6.8%," she said in an interview with Bloomberg, "India 
and China will be quite strong in actually pulling growth in the 
region." 
"But we must stay alert about a possible rise in inflation and a 
decline in people's purchasing power in 2008," she added.  Slower 
 
JAKARTA 00000038  003 OF 006 
 
 
global economic activity will also impact the economy, she said. 
 
¶9. Bank Indonesia is also positive about 2008 growth. BI predicted 
that the balance of payments surplus would rise 15% to $15.6 
billion, led by foreign direct investment.  According to Agence 
France-Presse, BI stated that the balance of payments surplus in 
2007 is estimated at $13.6 billion, with the surplus reaching $1.1 
billion in the third quarter.  BI estimates that the current account 
surplus will reach $9.3 billion in 2008, down from the $10.9 billion 
it estimated for 2007, due to slower growth in non-oil-and-gas 
exports as global demand slows, rather than faster import growth. 
The capital account surplus is seen rising to $6.3 billion from $5.6 
billion in 2007.  BI expects the investment climate to improve 
further so that it will also boost capital inflows, especially 
foreign direct investment.  In line with the bigger balance of 
payments surplus, BI is expecting foreign exchange reserves to rise 
to $72.9 billion at the end of 2008 from the $57.3 billion estimated 
for the end of 2007. 
 
¶10. The International Monetary Fund (IMF), on the other hand, 
forecasts a slower growth rate in 2008, at 6.1%, compared to 6.2% 
estimated in 2007.  According to its regional economic projection 
for the Asia Pacific region, Indonesia will be affected by tightened 
policies in several of the region's countries and by the slowing 
down of global demand in 2008.  However, the IMF expects Indonesia 
to achieve positive growth in terms of investment due to an 
improving investment climate. 
 
October to December Long-Term Bond Auctions 
------------------------------------------- 
 
¶11. The GOI raised Rp 1 trillion ($0.1 billion) from bond auctions 
on October 30, 2007.  It sold Rp 900 billion ($95.6 million) of 
21-year bonds at a 10.15% yield and Rp 100 billion ($10.6 million) 
worth of 15-year paper at an average yield of 9.45%.  On November 
20, the GOI raised another Rp 1.5 trillion ($159.3 million) from 
auctioning five-year zero coupon debt priced to yield 9.869%, 
slightly below target of Rp 2 trillion ($212.3 million). Remarks 
from BI Deputy Governor Hartadi Sarwono the previous week that there 
was still room to cut interest rates later in 2007 failed to 
significantly boost demand for the bonds in the auction.  The bonds 
rank among the highest-yielding government debt in Asia. 
 
¶12. At its last 2007 bond auction on December 4, the GOI raised Rp 
4.1 trillion ($435.3 million) from issuing eight-year bonds priced 
to yield 9.63%, double its target of Rp 2 trillion ($212.3 million), 
due to strong demand from investors.  Ministry of Finance Debt 
Director Bhimantara Widyajala noted, "We have raised sufficient 
funds through bonds in 2007 to meet the budget."  The 2007 budget 
targets Rp 58.5 trillion ($6.2 billion) in bond issues. 
 
GOI Debt Buyback 
---------------- 
 
¶13. The Ministry of Finance bought back Rp 1.203 trillion ($127.7 
million) worth of government bonds maturing between 2008 and 2012 
via an auction on December 13, 2007.  The Ministry of Finance 
regularly cuts government-borrowing costs and stabilizes debt costs 
by buying back debt when bond prices fall. "The market response was 
good. Buybacks can improve investor confidence by maintain liquidity 
in the market while stabilizing bond prices," noted Rahmat 
Waluyanto, the Ministry's Director General of Debt Management. 
 
Central Bank Launches E-Banking 
to Support State Budget Management 
---------------------------------- 
 
¶14. On December 27, BI's Senior Deputy Governor Miranda Goeltom and 
Minister of Finance Sri Mulyani, witnessed the signing of Memorandum 
of Understanding (MOU) and the initial launch of BI Government 
Electronic Banking (BIG-eB).  The MOU was signed by BI's Deputy 
Governor Budi Rochadi and MOF's DG of Treasury Herry Purnomo. "The 
operation of BIG-eB system is an implementation of Law No. 1 of 2004 
regarding State Treasury, also an enhancement of fiscal and monetary 
authority coordination, through the service provided by Bank 
Indonesia to support government needs in improving the monitoring 
and management of its Budget", stated Goeltom in her speech. 
 
JAKARTA 00000038  004 OF 006 
 
 
 
¶15. The Treasury Law describes the Government Account as managed by 
the Minister of Finance, and maintained in Bank Indonesia.  The MOF 
will be able to obtain online and real time financial information of 
the Government Account in BI, and to accelerate reporting as well as 
transaction settlement process.  In the first phase, BIG-eB will 
make available the information module of all Government accounts 
(only in rupiah currency) maintained in the Head Office and in local 
offices of Bank Indonesia.  Phase II will implement a rupiah 
transaction module that can be settled through overbooking, such as 
Treasury Single Account (TSA). Phase III is a foreign exchange 
information and transaction  module implementation of all Government 
Accounts maintained in the Head Office or at the local offices of 
Bank Indonesia.  Phase IV will integrate the BIG-eB system with the 
other systems related to the budget management in the MOF. 
 
Banks Report Strong Third Quarter Results 
----------------------------------------- 
 
¶16. Companies across the range of sectors, including banking, turned 
in strong 3Q 2007 results by the end of the reporting period on 
October 31.  Bank Mandiri led advances in the banking sector, 
posting an almost threefold gain in third-quarter profit as loan 
demand increased and as it set aside less money for bad debts.  Bank 
Rakyat Indonesia (BRI) reported a 17% increase in profit for the 
first nine months of 2007, while Bank Danamon improved its profit 
performance by 22% over the same period. 
 
Khazanah Plans to Merge Its Two Indonesian Banks 
--------------------------------------------- --- 
 
¶17. On December 27, 2007 Malaysian state investment arm Khazanah 
Nasional Bhd, announced its plan to merge Bank Lippo and Bank Niaga, 
in line with BI's "single presence" policy.  This move would create 
a bank with combined assets of around Rp 85.6 trillion ($9.1 
billion), making it Indonesia's sixth-biggest lender.  According to 
a statement issued by Lippo, the merger is still subject to 
regulatory approvals.  Khazanah currently owns a 93% stake in Lippo 
through Santubong Investment BV and Greatville Pte Ltd and 64% share 
in Niaga through Bumiputra-Commerce Holdings Bhd. 
 
Stock Exchanges Merge to Form 
Indonesia Stock Exchange (BEI) 
------------------------------ 
 
¶18. The Indonesia Stock Exchange (BEI), a merger of the Jakarta 
Stock Exchange (JSX) and the Surabaya Stock Exchange (SSX), 
commenced its first day of trading on December 3, 2007.  The merged 
exchanges, legally effective on November 30, jointly host trading in 
approximately Rp 2,400 trillion ($256.8 billion) worth of stocks and 
bonds issued by 379 companies.  Before the merger, 353 companies 
were listed on the BEJ and 26 on the BES.  Capital Markets 
Supervisory Agency (BAPEPAM) Chairman Fuad Rahmany believes that the 
merger of the JSX and SSX will set the stage for development of 
deeper derivatives markets.  Previously the SSX, which specialized 
in bond trading, wanted to explore derivatives (futures, options, 
real-estate investment trusts) but the underlying asset was often 
traded on the larger, more liquid JSX.  As soon as the merged entity 
is stable, one bond market official predicted that the MOF and 
BAPPEPAM would roll out bond futures early 2008.  The SSX was 
already in the advanced stages of developing a financial futures 
contract for government bonds. 
 
State-Owned Toll Road Operator IPO Raises $380M 
--------------------------------------------- -- 
 
¶19. On October 26, 2007, the GOI raised Rp 3.47 trillion ($368.4 
million) from the sale of 30% of PT Jasa Marga, the country's 
leading toll road operator.  The Jasa Marga offer, with a price 
range of Rp 1,400 and Rp 1,800, was more than four times 
over-subscribed, fixing the price at the top of the range at Rp 
1,700.  About 40% of the institutional tranche went to international 
investors, while the remaining 60% was allocated to domestic 
investors.  The final price values the toll road operator at about 
22.5 times its projected 2008 earnings.  Analysts believe that 
Indonesia is picking up demand from investors who want to put their 
money into something other than China and the huge amount of money 
 
JAKARTA 00000038  005 OF 006 
 
 
currently pouring in from the US.  The deal is the second sale of 
stock in a state-owned company in 2007, after the government's 
secondary offering in PT Bank Negara Indonesia (BNI) at the end of 
July, which cut the government's stake in BNI from 99.1% to about 
73% and raised $774 million. 
 
Aceh Reconstruction Agency (BRR) 
Completes 100,000th Tsunami House 
--------------------------------- 
 
¶20. On December 14, 2007, close to the third anniversary of the Aceh 
tsunami disaster, the Agency for the Rehabilitation and 
 
SIPDIS 
Reconstruction of Aceh and Nias (BRR) symbolically handed over 138 
houses which included the 100,000th new house built for tsunami 
survivors.  The formal ceremony took place in Teunom village, Aceh 
Jaya district, one of the areas worst hit by the tsunami.  "We 
wanted to give a morale boost to the people here in rebuilding their 
district," spokesman of the agency Mirza Keumala said, adding that 
people still faced daily challenges as infrastructure remained poor. 
 Keumala said that reconstruction of a targeted 120,000 houses was 
expected to be completed by April 2008, and despite the formal 
ceremony on Friday, 103,000 have now been finished. 
 
¶21. Critics point out, however, that the housing program was behind 
schedule and that approximately 20% of all homes constructed remain 
vacant for various reasons, including shoddy construction and a lack 
of water, sewage, or electricity.  In one particularly remote area, 
the island of Simeulue, the regent recently complained publicly that 
BRR has only managed to construct 21 houses in the district despite 
having promised hundreds.  BRR has vowed to do better. 
 
¶22. Earlier, BRR head Kuntoro Mangkusubroto, launching a report on 
progress on tsunami recovery programs, said progress had been "very 
encouraging and better than planned three years ago" with more than 
102,000 homes built and another 20,000 due to be completed by June 
¶2008.  Mangkusubroto, a former mining minister, said that the agency 
was now focused on handing over assets and recovery efforts to the 
locals, but conceded that problems were emerging.  Decent housing 
remains a massive concern for the local population.  The agency, 
whose mandate ends in April 2009, plans to get 3,000 families still 
in temporary wooden barracks surrounding the provincial capital 
Banda Aceh into new homes by 2008.  "There will be no more housing 
projects or housing construction beyond April 2008, except one or 
two organizations," he warned in November.  "We understand there are 
still problems.  We are going to solve these problems."  Apart from 
houses, BRR has also coordinated and completed the reconstruction of 
about 2,000 km of roads, 800 schools, 600 hospitals and health 
centers, 17 seaports and 10 airstrips across the province by Nov 
¶2007. 
 
--------------------------------------------- ---- 
Table 2:  Selected Economic, Financial, and Trade Statistics, 
September - December 2007 
--------------------------------------------- ------ 
                          Sep    Oct    Nov   Dec 
--------------------------------------------- ------ 
CPI Inflation (YoY)       6.95   6.88   6.71  6.59 
 
CPI Inflation (MoM)       0.80   0.79   0.18  1.10 
 
Rp/USD Exch. rate(1)     9,137  9,103  9,376 9,419 
 
30-day SBI rate (1)       8.25   8.25   8.25  8.00 
 
Foreign Res. ($ bn)(1)    52.9   54.1  54.9 
 
JSX Composite Index(1)   2,359  2,643  2,688 2,746 
 
Exports ($ billion)        9.5   10.3    9.8 
 
Percent change (YoY)       7.6   17.6   10.0 
 
Imports ($ billion)        6.8    6.3    7.5 
 
Percent change (YoY)      17.4   19.3   20.4 
 
Trade Balance              2.7    4.0    2.3 
 
JAKARTA 00000038  006 OF 006 
 
 
 
Source: Bank Indonesia, BPS, JSX 
(1) End of period 
 
HUME