VZCZCXRO9845
RR RUEHCHI RUEHCN RUEHDT RUEHHM
DE RUEHJA #0469/01 0700314
ZNR UUUUU ZZH
R 100314Z MAR 08
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 8256
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHKO/AMEMBASSY TOKYO 1639
RUEHBJ/AMEMBASSY BEIJING 4796
RUEHBY/AMEMBASSY CANBERRA 2137
RUEHUL/AMEMBASSY SEOUL 4460
RUEAIIA/CIA WASHDC

UNCLAS SECTION 01 OF 02 JAKARTA 000469 
 
SIPDIS 
 
SIPDIS 
SENSITIVE 
 
DEPT FOR EAP/MTS AND EB/IFD/OMA 
TREASURY FOR IA-SETH SEARLS 
SINGAPORE FOR SUSAN BAKER 
COMMERCE FOR 4430-JEAN KELLY 
DEPARTMENT PASS FEDERAL RESERVE SAN FRANCISCO FOR CURRAN 
DEPARTMENT PASS EXIM BANK 
 
E.O. 12598: N/A 
TAGS: EFIN EINV ECON PGOV ID
SUBJECT: INDONESIAN ECONOMY - CAUTIOUSLY OPTIMISTIC DESPITE 
POTENTIAL GLOBAL PRESSURES 
 
 
¶1. (SBU) Summary: Local economists remain cautiously optimistic 
about Indonesian economic forecasts for 2008 despite global and 
local pressures.  Indonesia's 2008 economic growth will be 6.0-6.3%, 
down from the originally forecasted 6.8%, according to economists. 
The U.S. economic slowdown combined with protracted high oil, mining 
commodity and agriculture prices have led to these growth rate 
revisions.  Due to high commodity prices, the Government of 
Indonesia (GOI) will spend a higher percentage - possibly up to 50% 
- of its 2008 budget on food and fuel subsidies.  The poor are 
disproportionately affected by increased transportation and food 
costs, a potential political liability for the 2009 elections.  End 
SSummary. 
 
Global Economic Downturn Anticipated 
------------------------------------ 
 
¶2. (U) Four top Indonesian economists discussed the global economic 
outlook and debated the implications for the Indonesian economy 
during an event in Jakarta sponsored by a prominent political risk 
consulting firm on February 29.  Panelists included: Fauzi Ichsan of 
Standard Chartered, Sebastian Paredes of Bank Danamon, Nicholas 
Cashmore of CLSA, and Anton Gunawan of Citi.  They predicted that 
skyrocketing demand from emerging markets and slow supply-side 
adjustments would keep oil, commodity and food prices high. 
Financial market instability would continue until investors 
understand the true level of losses in the U.S. sub-prime mortgage 
market. 
 
Limited Near-Term Impact on Indonesia 
------------------------------------- 
 
¶3. (U) The panelists expect the global downturn to slow growth in 
Indonesia to roughly 6.0-6.3%, significantly lower than the 
government's initial 2008 forecast of 6.8%, but on par with 
Indonesia's 2007 GDP growth rate.  The economists based their 
forecasts on the view that internal demand, which constitutes more 
than 60% of Indonesian GDP, will continue to accelerate and that 
Indonesia has a well-diversified export base, by product and 
destination. The panelists were more cautious about the outlook for 
foreign capital flows into Indonesia, given the increased aversion 
to risk among global investors.  However, none expected a sudden 
reversal of current levels of portfolio inflows. 
 
¶4. (U) Quality of near-term economic growth in Indonesia remains 
questionable, according to Citi's Gunawan.  The global slowdown 
disproportionately affects the labor-intensive manufacturing sector, 
clouding the job growth outlook.  He noted that the decline in 
unemployment last year - from 10.3% to 9.1% - in the formal sector 
masks significant underemployment and unemployment in the large 
informal sector.  He also observed that while real wages are 
increasing in some sectors, notably financial services, real and 
even nominal wages have fallen for many manufacturing workers. 
 
Global Prices Reduce Policy Flexibility 
--------------------------------------- 
¶5. (SBU) The level and pace of inflation and its impact on monetary 
and fiscal policies could create economic instability in Indonesia, 
according to the experts.  Continuing high globll commodity and food 
prices would force the centa l bank - Bank Indonesia (BI) - to 
maintain currnnt interest rate levels, potentially slowing credit 
growth, according to a majority of the panelists   One panelist also 
noted that in recent discussoons, BI officials stated that the 
central bank pa ns to use its substantial foreign exchange reservss 
to maintain the value of the Rupiah in an effort to control imported 
inflation.  While Indonesiah(as roughly $56 billion in foreign 
exchange resevves, BI cannot continue this policy indefinitely iQ 
downward pressure on the currency remains signiiicant. 
 
¶6. (SBU) On the fiscal side, panelists noted that high and rising 
oil and food prices havei(ncreased the cost of the government's 
subsidy rggime.  The panelists warned that the Indonesian goe rnment 
could spend as much as 50% of its 2008 bddget on subsidies, 
particularly fuel subsidies, if oil remains near $100 per barrel. 
Since increasd  transportation and food costs disproportionately 
affect the poor, the current administration is ul(ikely to cut the 
subsidy programs in advance oftthe 2009 election.  Panelists also 
 
JAKARTA 00000469  002 OF 002 
 
 
noted that the increased spending on subsidies and cash transfers 
leading up to the election would crowd out much needed 
infrastructure investment.  Further, as the 2009 election season 
heats up, the executive and legislative branch's appetite for reform 
will diminish. 
 
Policy Inertia Prevents Agriculture Boom 
---------------------------------------- 
 
¶7. (SBU) Nicholas Cashmore stated that Indonesia is well positioned 
to take advantage of global economic trends.  Higher commodity 
prices could increase agricultural sector growth, leading to higher 
growth in rural communities.  Cashmore conceded that the slow 
approval processes for hybrid seeds, land use policies that prohibit 
efficient use of farmland, and poor irrigation systems in Indonesia 
are hampering the sector's ability to take advantage of current 
price levels.  However, he argued that the private sector now has a 
strong incentive to push for policy changes and make the investments 
in rural infrastructure needed to increase farm yields in Indonesia. 
He also noted that the gap between wages in Indonesia and China has 
continued to narrow, increasing foreign direct investment interest 
throughout the country. 
 
HUME