VZCZCXRO1954
RR RUEHCHI RUEHCN RUEHDT RUEHHM
DE RUEHJA #0671/01 0940805
ZNR UUUUU ZZH
R 030805Z APR 08
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 8546
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHRC/USDA WASHINGTON DC
RUEHKO/AMEMBASSY TOKYO 1745
RUEHBJ/AMEMBASSY BEIJING 4867
RUEHBY/AMEMBASSY CANBERRA 2255
RUEHUL/AMEMBASSY SEOUL 4496
RUEAIIA/CIA WASHDC

UNCLAS SECTION 01 OF 02 JAKARTA 000671 
 
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/KELLY 
DEPARTMENT PASS FEDERAL RESERVE SAN FRANCISCO FOR TCURRAN 
DEPARTMENT PASS EXIM BANK 
USDA/FAS/OA YOST, MILLER, JACKSON 
USDA/FAS/OCRA CRIKER, HIGGISTON, RADLER 
USDA/FAS/OGA CHAUDRY, DWYER 
 
E.O. 12598: N/A 
TAGS: EFIN EAGR ECON PGOV ID
SUBJECT: INDONESIA: DIVERGENT VIEWS ON IMPACT OF GLOBAL ECONOMIC 
INSTABILITY 
 
 
¶1. (U) Summary: The U.S. economic downturn will decrease Asian 
economic growth prospects, according to Morgan Stanley Asia Chairman 
Stephen Roach, who spoke to Indonesian business executives on March 
¶31.  Lower U.S. consumption will likely reduce Asian exports to the 
U.S., a significant driver of growth.  Roach also warned that 
growing protectionist sentiment in the United States could result in 
higher world inflation and tighter monetary policies. In contrast, 
the World Bank Chief Economist for East Asia predicted only a modest 
slowdown in the United States and limited impact on Asia.  Both 
economists raised concerns about the severe effect of rising food 
prices on the world's poor.  Nehru warned governments not to respond 
with market distorting price controls and subsidies.  Indonesia's 
large domestic economy and diversified export base reduce the 
repercussions of a global economic slowdown, but poverty and the 
risks to economic growth are rising.  Recent bond and equity market 
movements in Indonesia reveal increased investor concern.  End 
summary. 
 
Morgan Stanley: Worst yet to Come 
--------------------------------- 
¶2. (U) The simultaneous collapse of the housing and credit markets 
in the United States will lead to a prolonged period of economic 
retrenchment in the United States and around the world, according to 
Morgan Stanley Asia Chairman Stephen Roach.  Roach identified three 
rounds of impacts: the first in financial markets, the second in U.S 
homebuilding and consumption, and the third in reduced growth in 
world trade and capital flows.  According to Roach, the first-order 
impacts may have reached their peak, but the second and third round 
effects will pull down world growth for the next few years.   Easy 
credit access and the wealth effect of higher housing prices spurred 
unprecedented U.S. consumer spending in recent years, Roached noted. 
 U.S. wages have grown at a significantly slower pace than 
consumption for the past five years. 
 
¶3. (SBU) Roach rejected both decoupling - the notion that Asia will 
be unaffected by a U.S. economic slowdown - and the theory that 
consumption in China and India could compensate for significantly 
lower U.S. consumption.  Growth in Asia as a region over the past 
twenty years has been dependent on exports, particularly to the 
United States, according to Roach.  Exports comprise 45% of GDP in 
Asia in 2006, compared to less than 20% in 1980.  In 2006, 21% of 
China's exports, 23% of Japan's exports, and 14% of ASEAN's exports 
went to the U.S.  Roach said that Japan will enter a recession soon, 
given the high proportion of Japanese exports destined for the 
United States.  While intra-regional trade and internal consumption 
are rising across Asia, these sources of growth are relatively small 
when compared to the United States market.  Combined personal 
consumption in China and India in 2006 was less than $2 trillion, 
while annual U.S. personal consumption was more than $9 trillion. 
 
¶4. (U) Roach's greatest concern is that the current economic crisis 
in the U.S. will result in a new era of anti-globalization, 
characterized by protectionist trade policies, which prompt higher 
inflation and interest rates and lower investment returns.  Labor 
compensation as a share of national income has remained steady or 
declined over the past ten years, despite significant gains in 
productivity, lending support to views that globalization has not 
improved the lives of average people.  High oil and food prices also 
put pressure on middle- and low-income households around the world, 
and have already prompted governments to erect trade barriers. 
While Roach anticipates a decrease in world oil and mineral prices 
over the next year, he predicts agriculture prices will remain high 
due to demand from emerging markets and alternative energy 
producers. 
 
World Bank: Asia positioned to weather the storm 
--------------------------------------------- --- 
¶5. (U) World Bank Chief Economist for East Asia Vikram Nehru expects 
the United States economy to recover over the next 12-18 months and 
believes the United States' economic problems will have a minimal 
affect on Asian growth rates.  Asia's high savings rates, strong 
 
JAKARTA 00000671  002 OF 002 
 
 
productivity growth, large current and capital account surpluses, 
and fiscal capacity to respond to slower export growth will provide 
a sufficient cushion to absorb slower U.S. demand for Asian exports. 
 In contrast to Roach, Nehru said that the importance of the U.S. to 
world growth has receded significantly.  U.S. share in world imports 
dropped from over 18% in 1999 to roughly 15% in 2005, while 
developing countries outside Asia now consume more than 20% of world 
imports.  Nehru believes that domestic demand will be a key force 
behind economic growth in Asia. 
 
¶6. (U) Rising global food prices are a serious risk to Asia and the 
world, according to Nehru.  High food prices could erase the 
reduction in poverty in the region achieved over the past 20 years 
of high economic growth in Asia.  Asian governments must avoid 
widespread use of price controls and subsidies to dull the impact of 
high global prices.  These policies tend to be regressive, lead to 
significant economic distortions and encourage black market 
activity, according to Nehru.  Instead, Nehru encouraged governments 
in Asia to use progressive policies, such as targeted cash transfers 
to the poor, which directly improve the purchasing power of 
low-income households. 
 
Indonesia: Risks Increasing 
--------------------------- 
¶7. (SBU) Indonesia's large domestic economy and diversified export 
base reduce its vulnerability to a significant slowdown in world 
growth. However, risks to economic performance are rising, based on 
Morgan Stanley and World Bank analysis.  High food prices are 
straining household budgets and contributing to higher overall 
inflation rates, which will curb domestic consumption.  Indonesian 
headline inflation jumped to 8.17% in March, as food, tobacco, and 
clothing prices soared. If metal and mineral prices decline in line 
with Roach's predictions, Indonesia's export growth rate could slow 
markedly.  In addition, while only 11% of Indonesian exports go 
directly to the United States, 13% of the country's exports go to 
Japan, which is also facing slower growth, reducing the scope for 
growth in Indonesian exports.  Indonesia also has less flexibility 
to respond to declining internal and external demand with 
expansionary fiscal policy.  The overall subsidy bill - estimated at 
25-30 percent of the overall budget - has reduced the scope for 
other spending. 
 
¶8. (U) Investor concern about Indonesia is mounting, according to an 
April JP Morgan report.  A growing number of asset managers are 
nervous about the ability of the Indonesia government to maintain 
the FY08 projected budget and funding plan in light of increasing 
fuel subsidies.  The 10-year local bond price has decreased by 9% 
since the end of February.  The Jakarta Composite Index also 
declined this week on concerns that Bank Indonesia will maintain 
interest rate levels despite growing inflation, raising the risk of 
negative real interest rates, which could prompt an exodus of "hot 
money."  JP Morgan analysts have recommended that investors reduce 
holdings in banking institutions with large exposures to the 
consumer market or large bond portfolios. 
 
HUME