VZCZCXRO7736
RR RUEHCHI RUEHCN RUEHDT RUEHHM
DE RUEHJS #0121/01 3030910
ZNR UUUUU ZZH
R 290910Z OCT 08
FM AMCONSUL SURABAYA
TO RUEHC/SECSTATE WASHDC 0315
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUEHBY/AMEMBASSY CANBERRA 0154
RUEAIIA/CIA WASHDC
RHHMUNA/HQ USPACOM HONOLULU HI
RUEHJA/AMEMBASSY JAKARTA 0300
RUEHJS/AMCONSUL SURABAYA 0320
RUEHKO/AMEMBASSY TOKYO 0050

UNCLAS SECTION 01 OF 02 SURABAYA 000121 
 
SENSITIVE 
SIPDIS 
 
DEPARTMENT FOR EAP/MTS, EAP/EP, EEB/IFD/OMA, INR/EAP,E 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EFIS EIND ETRD EINV PGOV ID
SUBJECT: EAST JAVA: WAITING FOR THE OTHER SHOE, ISOLATION IS NO 
INSULATION FROM GLOBAL FINANCIAL CRISIS 
 
REF: JAKARTA 1940 
 
SURABAYA 00000121  001.2 OF 002 
 
 
Sensitive But Unclassified.  Please Protect Accordingly. 
 
 
 
¶1. (SBU) Summary: Uncertainty about the full extent of the 
global financial crisis continues to cause a lack of liquidity 
in all sectors of East Java's economy and the Indonesian economy 
more broadly.  This was the theme of a roundtable discussion 
with visiting EAP/MTS Director Kamala Lakhdhir, which included a 
Bank Indonesia official and leading East Java business people. 
Participants agreed that uncertainty in short-term market prices 
for finished goods and inputs and especially tight credit have 
already had a serious impact on the health of East Java's 
overall economy.  Businesses are unable to take advantage of 
dropping prices for inputs driven by low expectations for growth 
due to tightening credit.   Business people asked what the 
United States might do to restore confidence and reverse this 
trend.  End Summary 
 
 
 
¶2.  (SBU) Congen Surabaya Principal Officer, Pol/Econ Officer 
and visiting EAP/MTS Director Kamala Lakhdhir met with five 
local economic observers on October 27.  Each shared local views 
on the current financial crisis, they were:  Mr. Indra Fauzi of 
Regional Economic Development Institute (REDI); Mr. Wibisono, 
Deputy Director of the Bank of Indonesia (Surabaya); Mr. Frank 
Pandji, Director of PT Mepoly Plastics; Ms. Erawati, Executive 
Secretary of the Indonesian Textile Association; and Mr. Novi 
Saputra, Marketing Director of PT. Kelola Mina Laut, a seafood 
processing company. 
 
 
 
¶3.  (SBU) Indonesian Finance Minister Sri Mulyani has recently 
both reassured and warned Indonesians that while Indonesia has 
diversified its exports in the decade following the Asian 
Financial crisis,  it is still exposed to a downturn in the U.S. 
market.  Indonesia's vulnerability is the nation's strong links 
to Southeast Asian markets more reliant on US consumers. 
Participants touched on key indicators in each of their 
industries that indicate trouble on the horizon -- in 
particular, concern for the future has slowed the circulation of 
cash.  Shifts in commodity prices, tightening credit and a 
creeping uncertainty have spawned some confusing trends. 
 
 
 
¶4.  (SBU) The East Java textile industry runs on polyester 
staple fiber and its price is directly tied to the price of oil. 
 According to Ms. Erawati, recent plunging oil prices have 
caused a drop in the price of polyester fiber but this hasn't 
taken pressure off the industry.  Paradoxically, the causes of 
the fiber's price drop -- low oil prices -- are in part driven 
by expectations of reduced consumption in the U.S.  This same 
expectation drives a lack of confidence in export industries by 
Indonesian banks.  Such is the uncertainty that local banks are 
delaying payment of letters of credit until full terms are met, 
apparently concerned that foreign customers and their financial 
institutions could fail in the near term.  The lack of trust 
between banks and a wait-and-see attitude towards U.S. consumer 
demand continues to tighten textile companies' access to credit 
in what might otherwise be a profitable period. 
 
 
 
¶5.  (SBU) The seafood processing company, Kelola Mina Laut, has 
customers on nearly every continent and has thus distributed its 
risk geographically.  While demand for seafood has not softened, 
it has moved down the food chain towards less expensive seafood 
products.  Mr. Saputra sees this instability as an opportunity 
for market leaders in a given sector.  Companies recognized as 
the most stable can now gain market share as banks and customers 
put pressure on smaller competitors by choosing large, reliable 
suppliers over suppliers who might go belly up. 
 
 
 
¶6.  (SBU) Frank Pandji's plastic hose and coupling manufacturer 
could be a poster child for the sort of "unlinked" Indonesian 
business presumably unharmed by the foreign market fluctuations 
described by Finance Minister Sri Mulyani.  However, Frank 
Pandji told us that while his products target the Indonesian 
 
SURABAYA 00000121  002.2 OF 002 
 
 
market almost exclusively, he expects a delayed impact on demand 
as exporters using his products see a drop in overseas demand. 
Reflecting hard-won experience during the Asian financial 
crisis, Mr. Pandji said he has amassed cash reserves roughly 
three times his total outstanding credit in anticipation of 
tightening credit. 
 
 
 
¶7.  (SBU) The Deputy Director of Bank Indonesia expressed 
concern that rumors are driving a lot of economic behavior and 
uncertainty is eroding otherwise sound banking practices.  East 
Java's annual inflation rate is running at 11.39%, compared to 
12.58% nationally, reflecting different economic climates. 
Overseas workers have a significant role in East Java's economy. 
 An estimated 140 million USD will come back to East Java from 
overseas workers in 2008.  Roughly 50% of remittances from 
overseas workers are sent electronically, the rest is carried 
home in cash.    However, precise statistics are unavailable 
because wire transfer companies are not required to report 
amounts transferred, according to Wibisono.  A softening labor 
market  at home and abroad could lead to increasing pressures on 
East Java's economy.  The most vulnerable among an estimated 
70,000 of East Java's overseas workers could be forced out of 
work abroad, and prospective overseas job seekers might be 
forced to rely solely on the East Java job market.   East Java's 
 official unemployment rate is currently 10%.  However, since an 
individual working only one day in the two week period preceding 
the survey is counted as employed, unemployment figures 
calculated on a US model would push the number to several times 
its official level.  Mr. Wibisono echoed the assumption of all 
at the discussion that while East Java is generally insulated 
from the direct impacts of sharp market fluctuations and 
uncertainty, it is only a matter of time before serious 
instability overseas will make itself felt in East Java. 
MCCLELLAND