VZCZCXYZ0005
RR RUEHWEB

DE RUEHJA #1872/01 2812155
ZNR UUUUU ZZH
R 072155Z OCT 08
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 0274
INFO RUCPDOC/USDOC WASHDC 1530
RUEATRS/DEPT OF TREASURY WASHDC
RUCNASE/ASEAN MEMBER COLLECTIVE
RUEHKO/AMEMBASSY TOKYO 2575
RUEHBJ/AMEMBASSY BEIJING 5463
RUEHBY/AMEMBASSY CANBERRA 3126
RUEHUL/AMEMBASSY SEOUL 4982
RHEHNSC/NSC WASHDC
RUEAIIA/CIA WASHDC

UNCLAS JAKARTA 001872 
 
SENSITIVE 
SIPDIS 
 
DEPARTMENT FOR EAP/MTS, EAP/EP, EEB/IFD/OMA 
TREASURY FOR M.NUGENT AND T.RAND 
COMMERCE FOR 4430 BERLINGUETTE/KELLY 
DEPARTMENT PASS FEDERAL RESERVE SAN FRANCISCO FOR CURRAN 
DEPARTMENT PASS EXIM BANK 
SINGAPORE FOR S. BAKER 
TOKYO FOR MGREWE 
USDA/FAS/OA YOST, MILLER, JACKSON 
USDA/FAS/OCRA CRIKER, HIGGISTON, RADLER 
USDA/FAS/OGA CHAUDRY, DWYER 
USTR WEISEL, EHLERS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON ETRD EINV ID
 
SUBJECT: GOI Focuses on Policy Coordination In Bid to Reduce Impact 
of Growing Financial Crisis 
 
¶1.  (SBU) SUMMARY:  A four-day local holiday beginning September 30 
had insulated Indonesian markets from recent financial market 
volatility.  On October 6, however, the main Jakarta Stock Exchange 
index sank 10%, the rupiah weakened by 1.5%, and domestic bonds sold 
off, causing a spike in benchmark 10-year domestic government bond 
yields to over 14%.  As of late-day October 7, the stock market was 
down by another 1.75%, the rupiah finished flat following 
considerable volatility and government bonds fluctuated wildly , 
with ten-year yields moving from 12.1% to 14.7%, before closing at 
14.256%.  President Yudhoyono (SBY) convened a special meeting 
October 6 to discuss how Indonesia could reduce the impact of the 
growing financial crisis and respond to expected reduced demand from 
a slowing global economy.  Following the meeting, the government of 
Indonesia released a statement announcing extension of tax 
incentives aimed at attracting additional investment.  On October 7, 
Bank Indonesia continued to tighten monetary policy, raising 
overnight policy interest rates by 25 basis points for a sixth 
consecutive time (to 9.5%), in line with expectations.  BI's 
decision followed release of September consumer price inflation 
data, showing the fastest inflation in two years (0.97% m-o-m/12.14% 
y-o-y), up from the pace in August and slightly above market 
expectations.  END SUMMARY. 
 
¶2. (U) Note:  With financial markets gyrating, SBY named State 
Minister for State Enterprises Sofyan Djalil interim Finance 
Minister for ten days, beginning October 7, during Finance Minister 
Sri Mulyani's absence from the country due to attendance at upcoming 
World Bank/IMF meetings and a trip to the Gulf, where activities 
include a road show previewing Indonesia's planned global sukuk 
(shariah bond) issuance. 
 
BI HIKES POLICY RATE AGAIN, CONTINUES MEASURED TIGHTENING 
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¶3. (U) BI's latest hike should help to support the rupiah, as BI 
attempts to avoid sharp fluctuations in the exchange rate.  The hike 
was welcomed by analysts, who had called for continued central bank 
tightening to reduce strong domestic demand pressures which have 
fueled inflation.  Many observers believe this may be the last in 
this series of rate hikes, as inflation is expected to begin 
trending down on lower energy and food prices.  BI's October 7 
monetary policy statement noted the decision had been taken after 
carefully considering recent financial and economic developments and 
their possible effects on the national economy.  The statement 
further advised that going forward, Bank Indonesia will continue to 
coordinate with the government in assessing ongoing developments and 
taking necessary steps to maintain the sustainability and stability 
of Indonesia's financial system.  The statement noted complete 
information about the latest economic conditions, including balance 
of payments information, would be included in BI's Monetary Policy 
Report, available October 14. 
 
¶4. (U) Although the October 7 statement did not report gross foreign 
reserves as of end-September, the BI web site reported official 
reserve assets of $57.47 million (as of September 23), down from 
$58.36 billion at end-August, and foreign currency reserves of $54.9 
billion, down from $55.9 billion at end-August.  These declines came 
as BI reportedly intervened frequently, though selectively, in 
recent weeks to support the rupiah, which has fallen 2.3% in the 
past month.  Indonesia remains vulnerable to sudden reversals in 
capital flows due to increased risk aversion.  Bank Indonesia 
Governor Boediono told the press on October 5 that he believed most 
of the truly "hot money" had already exited Indonesia and that 
investors who remained are focused on Indonesia's economic 
fundamentals, which remain solid. 
 
¶5. (U) Bank Indonesia's latest rate hike followed its decision on 
September 23 to extend the period of Fine Tune Operations, part of 
its Open Markets Operation, from a period of 1 to14 days to a period 
 
of 1 day to 3 months.  This period extension provides BI with wider 
flexibility for liquidity management and may improve its 
effectiveness in maintaining a well functioning money market.  Other 
regulatory issues, including possible changes in reserve 
requirements, reportedly remain under consideration. 
 
INFLATION TICKS UP ON HOLIDAY SPENDING 
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¶6. (U) September consumer price inflation released October 6 showed 
CPI running at a two-year high (0.97% m-o-m/12.14% y-o-y), and 
slightly above market expectations.  The up-tick in inflation was 
expected, given increased demand associated with the Ramadan and 
Idul Fitri holidays.  Raw food prices rose 1.9% m-o-m (20.12% y-o-y) 
and processed food rose 0.94% m-o-m (11.19% y-o-y).  Housing and 
utilities rose 1.22% m-o-m (11.02% y-o-y), reflecting in part the 
effect of LPG price hikes made in July and August. 
 
TRADE BALANCE IMPROVES, AS IMPORTS FALL 
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¶7. (U) August trade figures released October 6 show continued strong 
economic activity and an improved trade balance, with the trade 
account moving back to surplus following July's trade deficit. 
While exports declined by 0.4% m-o-m in August (to $12.5 billion), 
they rose by 30.3% y-o-y.  Declining commodity prices contributed to 
the slight monthly decline in exports, but crude palm exports rose 
strongly (to $1.03 billion, from $581.6 million in July) on higher 
volumes as the GOI cut export taxes.  Total imports fell 7.5% m-o-m 
to $11.86 billion, but imports outside the free-trade zones rose 55% 
y-o-y. 
 
EFFORTS TO DEAL WITH MARKET VOLATILITY INCLUDE 
TEMPORARY BAN ON SHORT SELLING 
- - - - - - - - - - - - - - - - 
 
¶8. (U) The volatility which hit the Indonesian Stock Exchange, whose 
main index fell more than 10% (to 1,648.74) on October 6, followed a 
4-day holiday closure from September 30 through October 3.  The 
Indonesian Stock Exchange had announced September 30 the imposition 
of a temporary ban on short selling for the month of October.  The 
Exchange has lost more than 35% from its January 14 high as lower 
commodity prices and greater risk aversion have reduced demand for 
emerging market equities. 
 
SBY ENCOURAGES A MORE COMPREHENSIVE RESPONSE 
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¶9. (U) As volatility has increased in international financial 
markets, the Yudhoyono administration has begun to mobilize efforts 
across government agencies.  SBY has reached out to the private 
sector and large state-owned enterprises to contribute to a more 
comprehensive response aimed at maintaining economic growth of at 
least six percent.  This wider engagement should augment the 
continuing close collaboration between the Ministry of Finance and 
Bank Indonesia. 
 
¶10. (U) On October 6, SBY convened a special plenary meeting of 
ministers, BI, and leaders of state-owned enterprises (SOEs), the 
banking community, and representatives of the private sector, 
academicians and the media to discuss Indonesia's response to the 
growing crisis in international financial markets.  SBY noted 
Indonesia was in a much better position to face this crisis than it 
had been ten years ago and highlighted greatly improved political 
and economic stability.  SBY outlined ten instructions focused on 
the united effort needed to manage and overcome the effects of the 
current financial crisis on Indonesia.  A central aim is to maintain 
economic growth of 6%.  SBY said this will require the concerted 
efforts of the government, BI and the private sector.  These efforts 
 
will include the guarantee of credit and liquidity, improvements in 
regulatory policy, the investment climate and incentives aimed at 
assisting the real sector to continue moving forward, and a campaign 
to promote consumption of domestic products.  SBY also stressed that 
the state budget should be optimized to spur economic growth, build 
a social safety net, increase efficiency, and limit consumption 
spending and discretionary spending that could be delayed.  He also 
noted that Indonesia must also take advantage of opportunities for 
trade and economic cooperation with other countries. 
 
GOI TO OFFER INCENTIVES TO ATTRACT INVESTMENT 
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¶11. (U) On October 6, the government of Indonesia announced issuance 
of a new government regulation (no. 62/2008, revising regulation no. 
1/2007), which will offer additional incentives to attract 
investment.  These incentives focus on expanding the number of 
sectors and local areas in which firms may invest and enjoy a lower 
income tax rate for up to six years (a reduction in net income of up 
to 30% of capital investment, over six years for up to 5% each 
year); accelerated amortization; a 10% income tax on dividends paid 
to foreign tax entities and favorable treatment of losses (in years 
5 through 10 of the investment).  Firms investing in specified 
sectors (including steel, forestry, geothermal, animal husbandry, 
coal mining, textiles, pulp and paper, oil refining, small-scale gas 
liquefaction, chemicals, agriculture, automotive parts, and 
electronics) will enjoy these benefits. 
 
Efforts to Reduce Budget Deficit, Seek 
Alternative Sources of Financing 
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¶12. (U) As the global credit crunch has driven up the costs of 
financing and of insuring against credit defaults, the Ministry of 
Finance has sought to ease financing requirements.  Finance Minister 
and Coordinating Minister for the Economy Sri Mulyani Indrawati has 
made a number of statements outlining her interest in limiting the 
2009 budget deficit to 1.5% of GDP, below its previous target of 
1.9% of GDP, and the possibility that the 2008 budget deficit may 
fall even further from a recently revised figure of 1.7% of GDP (vs. 
the original target of 2.1% of GDP), presumably as non-essential 
spending is deferred.  Sri Mulyani has also advised that the 
government would attempt to finance a larger portion of the budget 
deficit from bilateral borrowing rather than capital markets, 
although the government currently plans to move forward with its 
first global sukuk issuance later this year. 
 
ENCOURAGING REPATRIATION OF FUNDS 
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¶13. (U) According to press reports, the State Minister for 
State-Owned Enterprises, Sofyan Djalil, urged SOEs with off-shore 
foreign currency deposits in excess of specific needs to transfer 
those funds to the domestic banking system.  Djalil said companies 
such as Pertamina, Telkom, PLN, Aneka Tambang, Perusahaan Gas Negara 
and Timah should not park funds off-shore when Indonesia needed 
additional foreign currency. 
 
HUME