VZCZCXRO0483
RR RUEHCHI RUEHCN RUEHDT RUEHHM
DE RUEHJA #0243/01 0370801
ZNR UUUUU ZZH
R 060801Z FEB 08
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 7910
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHKO/AMEMBASSY TOKYO 1492
RUEHBJ/AMEMBASSY BEIJING 4702
RUEHBY/AMEMBASSY CANBERRA 1969
RUEHUL/AMEMBASSY SEOUL 4389
RUEAIIA/CIA WASHDC

UNCLAS SECTION 01 OF 03 JAKARTA 000243 
 
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: FINANCIAL SECTOR UPDATE AND IMF BRIEFING 
 
REF: JAKARTA 208 
 
¶1. (SBU) Summary.  The International Monetary Fund Senior Resident 
Representative in Indonesia briefed donors on the Indonesian economy 
on January 29.  The IMF said that GDP growth for 2008 is on target 
at 6.1%, lower than the Government of Indonesia's estimate of 6.7%. 
Reserves are a healthy $56 billion, covering 200% of short-term 
debt.  Indonesia may suffer a slowdown due to external factors, and 
inflation may be higher than targeted due to global commodity prices 
but the overall outlook is reasonably optimistic.  One of 
Indonesia's most respected economists is deeply skeptical of the 
theory that Asia has "decoupled" from western economies, noting that 
all emerging markets performance in 2008 will depend heavily on what 
happens in the U.S.  End Summary. 
 
IMF Staff Visit - Growth 6% in 2008 
----------------------------------- 
 
¶2. (SBU) IMF Senior Resident Representative in Indonesia Stephen 
Schwartz and his deputy, Armando Morales presented a briefing to 
donors on January 29. They are reasonably optimistic about 
Indonesia's economic outlook for 2008, citing stable macroeconomic 
trends, robust domestic demand, and signs of higher investment 
growth.  Foreign exchange reserves are a healthy $56 billion, 
covering 200% of short-term debt.  Reserves increased by $14.3 
billion last year and the Rupiah depreciated about 5%.  Although 
inflation accelerated in January, headline inflation remains close 
to BI's stated target range of 5-7%. 
 
¶3. (SBU) The IMF expects 6.1% GDP growth in 2008 due to strong 
domestic demand momentum and higher investment.  Their target is 
below the Government of Indonesia's estimate of 6.7%, mainly due to 
the IMF's expectation that net export growth will slow significantly 
in 2008.  The IMF does not anticipate any return to pre-financial 
crisis (1997-98) growth rates unless the GOI has some "breakthrough" 
on its slow investment and infrastructure.  The IMF expects the 
final 2007 budget deficit to be 1.2% of GDP, lower than the 1.5% 
previously forecasted by the government, due in part to slow 
spending rates among regional governments.  The banking sector 
remains strong. Non-performing loans (NPLs) have declined to 5-6% of 
total loans, close to Bank Indonesia's desired maximum of 5%.  Loan 
growth reached a robust 21% in 2007.  According to the IMF 
Representative, bank loans to businesses kept pace with loans to 
consumers. 
 
¶4. (SBU) Schwartz noted however, that although growth in China and 
India remain strong, the global outlook was "deteriorating almost by 
the week," which will affect all emerging markets.  Asia is less 
dependent on the U.S. as a source of growth and has a diverse export 
base. Asia's share of exports to the U.S. has been declining from 
around 20% in the 1970s to about half that today.  In 2006, 
Indonesia's exports as a percentage of total value were well 
diversified both in terms of export products (manufactured goods, 
oil and gas, agricultural products, etc.) and destination (Japan 
21%, EU 12%, U.S. 11%, China 8%, other Asia 31%), limiting the risk 
that a US slowdown will significantly slow export growth.  However, 
as recent volatility has shown, Asian financial markets are not 
"decoupled" from the U.S.  Other risks to Indonesia's economy 
include high international commodity prices, which have increased 
uncertainty about the inflation outlook and a recent increase in 
foreign currency borrowing in Indonesia, raising the risk of 
currency mismatches. 
 
Recent Sovereign Bond Issuance 
------------------------------ 
 
¶5. (SBU) In a January 28 meeting with Fauzi Ichsan, a well-respected 
economist and Vice President at Standard Chartered Bank, Ichsan 
noted that provinces are sitting $10 billion in which they have not 
yet spent.  Why did the Government of Indonesia (GOI) rush to issue 
bonds in the midst of market turmoil? (Note: On January 11, GOI 
raised $2 billion from two equally valued bonds, which expire in 
2018 and 2038.  The 10-year bond yield is 6.95% and the 30-year 
bonds offer 7.74%.)  The GOI now has to spend more than 100 basis 
points (bps) over last year, costing $30 million extra in interest. 
Finance Minister Sri Mulyani Indrawati has received a lot of 
criticism for this, Ichsan noted.  The IMF disagreed noting that had 
the GOI waited longer, it might have been worse.  There is also the 
 
JAKARTA 00000243  002 OF 003 
 
 
belief that the first emerging market to issue bonds in the new 
calendar year has an advantage with U.S investors.  Ichsan said that 
Indonesia will be do well by default, as U.S. interest rates drop, 
the interest rate differential will make Indonesian sovereign debt 
attractive. 
 
Widening Gap Between Rich and Poor, High Food Prices 
--------------------------------------------- ------- 
 
¶5. (SBU) Ichsan noted that the main problem in Indonesia is that the 
quality of growth is not good.  There is a widening gap between rich 
and poor.  The IMF concurred that there is only sluggish improvement 
in the poverty and social indicators.  The GOI is considering 
another economic policy package to focus more on poverty reduction 
and social programs to address this problem.  Ichsan noted that 
while high commodity prices are largely a global phenomenon, it will 
take time for domestic farmers to increase their yields in response 
to these trends due to structural inefficiencies in the sector.  As 
a result, in the absence of government intervention, commodity 
prices in Indonesia are likely to remain high for some time, 
exacerbating poverty rates.  Ichsan does not anticipate much outside 
investment in the agriculture in the near term with the exception of 
crude palm oil. 
 
Concern About State-Owned Enterprises 
------------------------------------- 
 
¶6. (SBU) The GOI has come to the IMF with concerns about state-owned 
Enterprises (SOEs) and the potential liability they present.  Their 
financial condition is difficult to gauge given the lack of 
transparency in their financial statements.  The Ministry of Finance 
has been making efforts at getting more reporting, but progress is 
slow.  State-owned Bank Nasional Indonesia (BNI), state energy 
monopolies Pertamina and PLN, and Garuda Airlines are some of the 
major SOEs in dubious financial shape.  Many SOEs are forced to go 
to the international capital markets to raise funds since there are 
too few domestic investors willing to take long-term risk, raising 
Indonesia's foreign currency exposure.  State-owned electricity 
authority PLN, for example, already has more than $2 billion in 
dollar-denominated bonds outstanding and is reportedly seeking new 
foreign currency loans.  The GOI is seeking IMF assistance to 
determine the composition of its overall foreign currency exposure, 
including SOE bond and loan obligations.  (Note: The Ministry of 
Finance is focusing on improving its overall risk management, and 
USG advisors are helping with this task.  As part of this, the GOI 
seeks to capture a picture of its current borrowing risk.) 
 
Bank Indonesia Scandal 
---------------------- 
 
¶7. (SBU) The Corruption Eradication Commission (KPK) has been 
investigating BI senior officials alleged involvement in the 
misappropriation of Indonesian Banking Development Foundation's 
("YYPI") funds between 2003-2004.  According to media reports, BI 
lent Rp 100 billion from the foundation, of which Rp 31.5 billion 
was disbursed to facilitate the Parliament's discussion of laws on 
BI and the remaining Rp 68.5 billion was used for legal aid for the 
resolution of the Bank Indonesia Liquidity Support ("BLBI") cases. 
After questioning six current and former BI and YYPI officials, on 
February 4 KPK named BI Governor Burhanuddin Abdullah, Oey Hoey 
Tiong (BI legal affairs director) and Rusli Simanjuntak (former head 
of BI communications bureau) as suspects.  In 2004, the Supreme 
Audit Board (BPK) audited BI's 2003 financial report and discovered 
the embezzlement but did not make the case public until 2006.  There 
have been several front-page media reports about it in recent weeks. 
 
 
¶8. (SBU) The IMF's Schwartz said that it is bit ironic that the 
current head of the BPK, Dr. Anwar Nasution, a Harvard-trained 
economist, was a Deputy Governor at BI at the time of the 
misappropriation.  There is no allegation of anyone taking the fund 
for personal enrichment and some at BI think the investigation is 
politically motivated.  BI Governor Abdullah has been "trying to do 
the right thing," according to the IMF.  Nasution is a tough Batak 
who speaks his mind, and sometime issues public statements which are 
overly blunt.  Nasution feels that the Ministry of Finance is 
cooperative with BPK investigations, but that BI is resisting. 
Schwartz was optimistic overall, however, stating that Indonesia's 
 
JAKARTA 00000243  003 OF 003 
 
 
current economic team - Coordinating Minister Boediono, Finance 
Minister Mulyuni, the Director General for Taxation and other key 
Directors General - is competent and reform minded. 
 
HUME