VZCZCXRO3636
RR RUEHCHI RUEHCN RUEHDT RUEHHM
DE RUEHJA #0515/01 0730849
ZNR UUUUU ZZH
R 130849Z MAR 08
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 8316
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHKO/AMEMBASSY TOKYO 1659
RUEHBJ/AMEMBASSY BEIJING 4813
RUEHBY/AMEMBASSY CANBERRA 2166
RUEHUL/AMEMBASSY SEOUL 4466
RUEAIIA/CIA WASHDC

UNCLAS SECTION 01 OF 04 JAKARTA 000515 
 
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 JANUARY - 
FEBRUARY 2007 
 
 
¶1. Summary.  Indonesia's inflation in February came as expected at 
7.4% on a year-on-year (YoY) basis, after an unexpectedly large jump 
in January.  Bank Indonesia (BI) has maintained its reference 
interest rate at 8% for the past four months.  Indonesia's economy 
grew at 6.3% in 2007, the fastest pace in a decade.  Fitch Ratings 
raised Indonesia's foreign and domestic currency debt ratings to two 
levels below investment grade, citing the Government of Indonesia's 
(GOI) continuous structural reform agenda and strong current account 
position.  During January-February, the GOI raised $2 billion from 
global dollar-denominated bonds, and Rp 12.9 trillion ($1.4 billion) 
from rupiah-denominated bonds.  The GOI closed the State Asset 
Management Company (PPA) on February 27.  The Capital Market and 
Non-Bank Financial Institution Supervision Agency (Bapepam-LK) and 
the Securities and Exchange Organization of Iran (SEO) signed an 
agreement to enhance bilateral cooperation.  The Indonesian 
Corruption Eradication Commission (KPK) named three central bank 
officials as suspects in a bribery case.  President Yudhoyono (SBY) 
sent two names to the Parliament as candidates for BI Governor for 
the next term, neither of them BI insiders.  This cable uses and 
exchange rate of 9,051 per dollar.  End summary. 
 
Unexpected Inflation Jump 
------------------------- 
 
¶2.  The Central Bureau of Statistics (BPS) recorded a 1.8% (MoM) 
rise in the consumer price index (CPI) in January, bringing annual 
inflation to 7.4%, the highest rate since September 2006, when the 
rate stood at 14.6%.  BI claimed that the sharp increase was a 
one-time shock, due to a rise in commodity prices.  However, BI 
subsequently increased its inflation forecast for 2008 to 6.0-6.5%, 
up from around 5%. Coordinating Minister for Economic Affairs 
Boediono stated that he is optimistic inflation will remain within 
its 4-6% forecast this year.  BI Governor Burhanuddin Abdullah and 
Finance Minister Sri Mulyani announced that the GOI will focus on 
inflation control.  Mulyani noted, "The President wants all 
food-related costs reduced." She added that the GOI has already 
reduced import duties and taxes to help bring price increases under 
control.  The GOI announced a large policy package designed to 
stabilize food prices on February 4 (ref B). 
 
¶3. The CPI rose by 0.7% in February or 7.4% on a yearly basis, in 
line with analysts' expectations after the January big jump. 
Analysts note that rising global commodity prices and disruptions to 
the transport of goods caused by floods and natural disasters in 
some parts of the country continue to put pressure to food prices in 
Indonesia. 
 
 
--------------------------------------------- - 
Table 1: Consumer Price Inflation Components 
         January - February 2008 
--------------------------------------------- - 
Component              January     February 
                      MoM    YoY   MoM    YoY 
--------------------------------------------- - 
Foodstuffs           2.77   11.35  1.59  12.18 
Prepared food, 
Beverages, tobacco   2.02    7.62  0.88   7.86 
Housing, water, 
electric, fuel       1.80    6.01 -0.01   5.15 
Clothing             2.31   11.21  0.76   11.43 
Health               0.72    4.51  1.56   5.46 
Education, 
recreation/sports    0.01    8.73  0.04   8.52 
Transportation, 
communication and 
financial services   0.24    1.39  0.02   1.39 
--------------------------------------------- - 
Total                1.77    7.36  0.65   7.40 
--------------------------------------------- - 
 
Core Inflation (1)   1.52    7.11  0.76   7.33 
 
Note: 
(1) Core inflation is a measure of inflation which excludes certain 
items that face volatile price movements i.e. energy, food 
products. 
 
JAKARTA 00000515  002 OF 004 
 
 
 
Source: Central Bureau of Statistics (BPS) 
 
Interest Rate Unchanged at 8.0% 
------------------------------- 
 
¶4. Although aggressive U.S. rate cuts created some space for easing, 
BI left its key interest rate unchanged for the fourth month at 8.0% 
on March 6, as policymakers were wary of mounting price pressures. 
The move was in line with analysts' expectations, following the 
unexpectedly sharp rise in inflation in January. 
 
¶5. On January 9, the Indonesian Deposit Insurance Agency (LPS) cut 
its rupiah and dollar maximum bank deposits rates by 25 basis points 
on expectations of lower inflation this year.  The new rates stand 
at 8% for rupiah deposits and 4.25% for dollar deposits.  Commercial 
banks closely watch LPS' decisions on maximum guaranteed bank 
deposit rates, which directly influence their profit levels. 
 
Fastest Growth in Ten Years 
--------------------------- 
 
¶6. On February 15, BPS announced that Indonesia's gross domestic 
product (GDP) expanded 6.32% in 2007, the fastest pace in ten years, 
as declining borrowing costs encouraged companies to invest and 
consumers to spend.  YoY growth for Q4 2007 was 6.25%, despite 
floods, other natural disasters, world oil price hikes and the US 
subprime mortgage crisis.  Construction, transportation and 
communications sectors contributed significantly to overall growth. 
Record coal prices and surging income from sales of cocoa and 
cooking oil have raised wages in those sectors, encouraging spending 
on cars, motorbikes and mobile phones.  Private consumption, which 
represents about 70% of the economy, rose 5.6% in Q4, the fastest 
pace in almost four years. 
 
Fitch Upgrades Ratings for Indonesia 
------------------------------------ 
 
¶7. On February 14, Fitch Ratings raised Indonesia's foreign and 
domestic currency debt ratings one notch from BBB- to BB, the 
highest level since the 1997 Asian financial crisis.  BB is two 
levels below investment grade and one grade higher than Moody's 
Indonesia rating, which is Ba3.  The Fitch rating is on par with 
Standard & Poor's, which rates the foreign currency debt at BB-/B 
and domestic debt at BB+/B.  Fitch cited the government's structural 
reform agenda and strong non-oil and gas exports as reasons for the 
upgrade.  "The GOI's efforts to tackle corruption, bureaucratic and 
regulatory hindrances to investments intensified in 2007 and were 
complemented by key investment legislation as well as an economic 
policy package specifically aimed at addressing main investor 
concerns," says Ai Ling Ngiam, Director in Fitch's Sovereign Ratings 
team. "Positive economic growth and balance of payments (BOP) 
implications had already become evident in 2007, enabling Indonesia 
to enter the current period of tightened global credit conditions 
and weaker external demand on a firmer footing," added Ms. Ngiam. 
The outlook is stable according to the agency's assessment. 
 
¶8. The ratings hike surprised some analysts given the uncertainty 
surrounding global economic trends.  Fauzi Ichsan, a respected 
economist with Standard Chartered, noted, "The upgrade would have 
been more realistic and understandable in the second half of the 
year when the global economic situation clarifies."  However, Fitch 
believes Indonesia will ride out a US slowdown better than its 
regional peers because Indonesia's exports to the US account for 
less than 5% of GDP, compared with more than 20% for Singapore, 
Malaysia and Hong Kong.  Only about 10% of Indonesia's exports to 
China are components for US-bound products, compared with more than 
50% for many other Asian nations.  The Wall Street Journal also 
pointed to Indonesian assets as a useful hedge against global 
concerns, noting that a global slowdown will affect some areas of 
the economy, resource stocks and producers of non-traded goods 
should remain strong.  David Fergusson, head of Indonesian research 
at Citigroup Global Markets also opined in a recent report that 
Indonesia is relatively immune to external shocks.  Finance Minister 
Sri Mulyani said the upgrade, "confirms our achievements to 
strengthen our fiscal structure." 
 
 
JAKARTA 00000515  003 OF 004 
 
 
Bond Auctions Well Subscribed 
----------------------------- 
 
¶9. Indonesian bonds have attracted strong interest from foreign and 
domestic investors because of their relatively high yields, 
particularly following the recent cut in US interest rates.  On 
January 10, the GOI offered global bonds worth $2 billion, 
attracting almost 200 orders from global institutional investor. 
The offering consisted of $1 billion worth of 10-year bonds with a 
coupon rate of 6.9%, and $1 billion worth of 30-year bonds with a 
coupon rate of 7.75%.  The GOI priced the global bonds to yield 3.1% 
and 3.3% points over comparable US Treasuries, respectively.  The 
price was higher than 1.9% points over US debt for its 2007 30-year 
bond sale and reflects the extent to which Asian markets have come 
under pressure. 
 
¶10. On January 22, the GOI raised Rp 2.3 trillion ($254.1 million) 
from an auction of 15-year and 30-year treasury bonds, priced to 
yield 10.55% and 10.8% respectively.  The issuance follows an 
auction of mid-term bonds launched on January 29 that raised a total 
of Rp 3.7 trillion ($408.8 million).  The mid-term bonds consisted 
of two- and five-year zero coupon bonds, priced to yield 8.25% and 
9.4% respectively. 
 
¶11. At its February 12 auction, the GOI raised a total of Rp 1.05 
trillion ($116 million), selling 5-year bonds at a 9.2% yield and 
10-year bonds at an average yield of 10.1%.  On February 19, the GOI 
raised another Rp 5.85 trillion ($646.3 million) from auctioning 
five- and ten-year zero coupon bonds priced to yield 9.55% and 8.6% 
respectively.  Without elaborating on the maturity of the debt to be 
issued, a MOF official said the ministry expects to issue treasury 
bills within the next two months and short-term debt regularly every 
month.  The government aims to raise Rp 91.6 trillion ($10.1 
billion) from net bond issuances in 2008, the finance ministry said. 
 
 
GOI Asset Sales above Target 
---------------------------- 
 
¶12. Scheduled to sunset on February 27, 2009, the State Asset 
Management Company (PPA) will cease operations September 2008 in 
order to settle accounts by the final deadline.  PPA is a successor 
organization to the Indonesia Bank Restructuring Agency which 
handled distressed assets after the financial crisis.  PPA generated 
Rp 1.57 trillion ($173.5 million) from asset sales in 2007, a figure 
slightly higher than its target of Rp 1.5 trillion ($165.7 million). 
 According to PPA President Director Mohammad Syahrial, PPA posted a 
pretax profit of Rp 71 billion ($7.8 million) last year, well over 
its target of Rp 12.9 billion (1.4 million).  Proceeds of the asset 
divestments fund the state budget. 
 
Capital Market Supervisory Agency 
Signs Sharia Cooperation Deal with Iran 
---------------------------------------- 
 
¶13. On January 28, the Capital Market and Non-Bank Financial 
Institution Supervision Agency (Bapepam-LK) and the Securities and 
Exchange Organization of Iran (SEO) signed an agreement to enhance 
bilateral cooperation, particularly in enhancing Indonesia's shariah 
stock market.  The total market capitalization of Iran's shariah 
market is $50 billion.  Besides cooperating in the shariah sector, 
the two countries plan to exchange training, information and 
expertise in order to develop institutional capacity and better 
regulate their capital markets. 
 
Central Bank Scandals 
--------------------- 
 
¶14. At its January 25 plenary meeting, the Indonesian Corruption 
Eradication Commission (KPK) named BI governor Burhannuddin Abdullah 
along with BI Legal Affairs Director Oey Hoey Tiong and BI Surabaya 
office Director Rusli Simanjuntak as suspects in a bribery case. 
Indonesian authorities detained Tiong and Simanjuntak in 
mid-February and banned 15 other BI officials from international 
travel until further notice, according to media reports.  The KPK 
alleges that BI officials paid Rp 31 billion ($3.4 million) in 
bribes to legislators and law enforcement officials in 2003 and 
 
JAKARTA 00000515  004 OF 004 
 
 
¶2004.  According to the KPK, BI disbursed Rp 96.25 billion or $10.5 
million ($7.5 million from the Indonesian Banking Development 
Foundation and $3 million from the BI budget) to lawmakers to 
resolve BI officials legal problems related to the misuse of Bank 
Indonesia Liquidity Assistance (BLBI) funds and to pass banking 
legislation.  BLBI refers to the emergency liquidity credits 
extended by Bank Indonesia to commercial banks during the 1997-98 
financial crisis. 
 
Candidates for New BI Governor 
------------------------------ 
 
¶15. On February 15, President Yudhoyono (SBY) sent two nominations 
for BI Governor to the Parliament, neither of whom is a BI insider. 
The candidates are Bank Mandiri's Chief Executive Agus Martowardojo 
and the deputy director of state asset company PT Perusahaan 
Pengelola Aset (PPA) Raden Pardede.  A committee in Parliament 
rejected the candidates in mid-March and the recommendation will go 
to Plenary.  The current five-year term of Governor Burhanuddin 
Abdullah ends by May 17.  SBY may have to choose another candidate 
if the Plenary decides against the nominees. 
 
--------------------------------------------- ---- 
Table 2:  Selected Economic, Financial, and Trade Statistics, 
November 2007 - February 2008 
--------------------------------------------- ------ 
                           Nov   Dec   Jan   Feb 
--------------------------------------------- ------ 
CPI Inflation (YoY)        6.71  6.59  7.36  7.40 
 
CPI Inflation (MoM)        0.18  1.10  1.77  0.65 
 
Rp/USD Exch. rate(1)      9,376 9,419 9,347 9,051 
 
30-day SBI rate (1)        8.25  8.00  8.00  8.00 
 
Foreign Res. ($ bn)(1)     54.9  56.9  56.0  57.1 
 
JSX Composite Index(1)    2,688 2,746 2,627 2,722 
 
Exports ($ billion)         9.8  10.9  11.1 
 
Percent change (YoY)       10.0  13.1  33.2 
 
Imports ($ billion)         7.5   6.8   7.6 
 
Percent change (YoY)       20.4  21.8  43.9 
 
Trade Balance               2.3   4.1   3.5 
 
Source: Bank Indonesia, BPS, JSX 
(1) End of period 
 
HUME