VZCZCXRO4400
RR RUEHCHI RUEHCN RUEHDT RUEHHM
DE RUEHJA #2057/01 3110950
ZNR UUUUU ZZH
R 060950Z NOV 08
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 0562
RUEATRS/DEPT OF TREASURY WASHINGTON DC
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC
RUEHKO/AMEMBASSY TOKYO 2692
RUEHBJ/AMEMBASSY BEIJING 5581
RUEHBY/AMEMBASSY CANBERRA 3251
RUEHUL/AMEMBASSY SEOUL 5094
RUEHGP/AMEMBASSY SINGAPORE 6368
RUEAIIA/CIA WASHDC

UNCLAS SECTION 01 OF 02 JAKARTA 002057 
 
SIPDIS 
SENSITIVE 
 
DEPT FOR EAP/MTS, EAP/EP AND EEB/IFD/OMA 
TREASURY FOR IA/MALACHY NUGENT AND TRINA RAND 
COMMERCE FOR 4430/KELLY 
DEPT PASS FEDERAL RESERVE SAN FRANCISCO FOR CURRAN 
DEPARTMENT PASS EXIM BANK 
SINGAPORE FOR SBAKER 
TOKYO FOR MGREWE 
USDA/FAS/OA YOST, MILLER, JACKSON 
USDA/FAS/OCRA CRIKER, HIGGISTON, RADLER 
USDA/FAS/OGA CHAUDRY, DWYER 
DEPT PASS USTR WEISEL, EHLERS 
 
E.O. 12598: N/A 
TAGS: EFIN EINV ECON EAGR ID
SUBJECT: BANK INDONESIA MAINTAINS POLICY RATE AS GROWTH OUTLOOK 
DETERIORATES 
 
¶1. (SBU) Summary.  Bank Indonesia (BI) held its overnight policy 
rate steady at 9.5% on November 6, in response to growing signs of a 
slowdown in economic activity in Indonesia.  A moderation in 
inflation in October also contributed to the decision.  While most 
market analysts expected BI to hold rates constant, some observers 
worry that higher rates will be necessary to discourage capital 
flight and support the value of the Rupiah (IDR).  BI's official 
reserves fell $6.5 billion to $50.6 billion during the month of 
October, due in large part to foreign exchange market intervention. 
The Rupiah closed at 11,098 IDR/USD on November 6, according to BI. 
End Summary. 
 
Signs of Slower Economic Activity Emerge 
---------------------------------------- 
¶2. (SBU) BI held its policy rate constant on November 6, in response 
to growing signs of a slowdown in economic activity.  Exports 
contracted 2.2% month-on-month (mom) in September as world demand 
and the price of Indonesian export commodities declined.  Imports 
also contracted, falling 6.7% mom, due to lower world oil prices and 
slower domestic demand.  Preliminary third quarter 2008 data from 
the manufacturing sector also point to a softening in economic 
activity.  Growth in the manufacturing sector as a whole slowed to 
1.6% yoy in the third quarter, down from 5.9% yoy and 3.3% in the 
first and second quarters, respectively.  The sharpest declines 
occurred in the textile (30.6% yoy), machinery and equipment (17.3% 
yoy), and chemical (13.0% yoy) sectors.  Anecdotal information from 
local bankers also points to significant tightening in USD credit 
funding for Indonesian firms in recent weeks, raising their funding 
costs and straining profits.  Tigor Siahaan, Managing Director and 
Country Business Manager for Citibank Indonesia, also predicted new 
entrants to the palm oil sector would come under increased financial 
pressure, given declining values of their inventories and future 
harvests and limited cash flow.  The Government of Indonesia will 
release official third quarter 2008 GDP figures on November 15. 
 
 
Inflation Cools in October, but IDR Remains Weak 
--------------------------------------------- --- 
¶3. (U) BI also based its decision on moderating price trends. 
Consumer price increases eased in October, rising 0.45% mom.  The 
yoy inflation rate fell to 11.8% from 12.1% in September.  Food 
price increases also moderated in October, with mom food price 
inflation slowing to 0.71% compared with 1.9% in September.  The yoy 
pace of food price inflation also fell, moving from 20.1% in 
September to 19.0% in October.  Retail food prices for palm oil, 
rice, and soybeans have begun to fall, easing pressure on household 
incomes, according to local data collected by the Foreign 
Agricultural Service.  Unbranded palm oil prices fell 6.4% during 
the month of October, while rice and soybean prices dropped 3.4%, 
and 4.1% over the same period.  An Indonesian pancake vendor 
recently noted to the local press that this is the first time input 
prices have declined in the five years he has been in business. 
The price of chicken, eggs, flour and instant noodles have been 
slower to adjust, rising or falling only slightly during October 
¶2008. 
 
¶4. (SBU) While domestic sources of inflation have eased, BI's 
decision to hold rates constant may increase pressure on the IDR, 
raising the risk of imported inflation.  The IDR/USD exchange rate 
continued to lose value in October as investor demand for IDR 
denominated assets declined.  The IDR has depreciated roughly 16.2% 
during the past month, and is down 21.3% year to date.  The 
depreciation in the IDR is generally in line with other currencies 
in the region year-to-date, although the IDR has declined more 
significantly than other currencies in recent weeks.  BI continues 
to intervene actively in foreign currency markets to support the 
IDR, as indicated by the $6.5 billion decline in official foreign 
currency reserves in October.  BI's November 6 press release noted 
that the central bank intends to continue to intervene in the 
 
JAKARTA 00002057  002 OF 002 
 
 
foreign exchange markets to prevent sharp fluctuations in the IDR. 
However, analysts note that BI's ability to control currency 
movements in the face of significant capital outflows is limited. 
 
HUME