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Viewing cable 08JAKARTA2207, FINANCIAL CRISIS BEGINS TO TAKE TOLL ON REAL ECONOMY AND

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Reference ID Created Released Classification Origin
08JAKARTA2207 2008-12-05 00:10 2011-08-24 01:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Jakarta
VZCZCXRO8957
PP RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHJA #2207/01 3400010
ZNR UUUUU ZZH
P 050010Z DEC 08
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC PRIORITY 0889
INFO RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUCPDOC/USDOC WASHDC 1546
RHMFISS/DEPT OF ENERGY WASHINGTON DC
RUCNASE/ASEAN MEMBER COLLECTIVE
RUEHKO/AMEMBASSY TOKYO 2812
RUEHBJ/AMEMBASSY BEIJING 5700
RUEHBY/AMEMBASSY CANBERRA 3374
RUEHUL/AMEMBASSY SEOUL 5200
RHEHNSC/NSC WASHDC
RUEAIIA/CIA WASHDC
UNCLAS SECTION 01 OF 03 JAKARTA 002207 
 
 
SENSITIVE 
SIPDIS 
 
DEPARTMENT FOR EAP/MTS, EAP/EP, EEB/IFD/OMA, E, EEB/ESC/IEC/ENR, 
EEB/IFD/ODF 
TREASURY FOR M.NUGENT AND T.RAND 
COMMERCE FOR 4430 BERLINGUETTE/KELLY 
ENERGY FOR PI-32/CUTLER AND GILLESPIE 
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:  FINANCIAL CRISIS BEGINS TO TAKE TOLL ON REAL ECONOMY AND 
GROWTH FORECAST REDUCED (AGAIN) 
 
Ref: Jakarta 2140 
 
1. (SBU) Summary:  A sharp slowdown in export demand is beginning to 
take a toll on Indonesia's real economy, resulting in a growing 
number of layoffs and production cuts.  Continued tight credit 
markets are posing an added burden on business and played a role in 
the government takeover and bailout of Bank Century.  Coordinating 
Minister for Economic Affairs and Finance Minister Sri Mulyani 
Indrawati warned that 2009 economic growth could slow to 4.5%, 
despite fiscal stimulus.  With the Indonesian rupiah remaining weak, 
Bank Indonesia provided further guidance on recently issued foreign 
exchange regulations, explicitly prohibiting the purchase of foreign 
exchange for the use of structured products aimed at return 
enhancement.  Lingering questions about the Bakrie Group's attempted 
workout of debt issues continued to weigh on the equity market.  End 
summary. 
 
Growth Forecast Reduced As Export Demand Falls 
- - - - - - - - - - - - - - - - - - - - - - - 
 
2. (U) With total exports down 11.61% from September to October (see 
septel) and a sharp downturn in orders for early 2009 from 
traditional export markets, Indonesia's "real economy" is beginning 
to experience the effects of the growing global economic slowdown. 
With the outlook for 2009 economic growth remaining poor, 
Coordinating Minister for Economic Affairs and Finance Minister Sri 
Mulyani Indrawati has warned that 2009 economic growth may slow to 
as low as 4.5%, substantially below the 6.2% rate the government 
continues to expect for 2008.  (Note:  The Finance Minister's latest 
estimate, made on December 2 to the House of Representatives, is for 
2009 economic growth between 4.5 and 6 percent.)  As reported 
reftel, many market analysts continue to forecast 2009 growth of 3 
to 4 percent, although domestic analyst forecasts tend to be 
slightly higher. 
 
Reports of Production Cuts and Layoffs Cause Alarm, 
Prompting Calls for More Government Stimulus 
- - - - - - - - - - - - - - - - - - - - - - - 
 
3. (U) Firms are beginning to react to worsening global economic 
conditions by cutting production and laying off workers.  The 
Ministry of Labor and Migration has said that, as of November 28, 
nearly 17,000 workers had already lost their jobs and about 6,600 
had been laid off (year to date).  Employers had already informed 
the Ministry that they are in the process of dismissing another 
24,000 employees, and laying off an additional 19,000 employees. 
The job losses have been heaviest in the Jakarta area (over 14,000), 
but are spread throughout the country.  While job cuts in the formal 
sector appear to have been relatively limited to date, many business 
associations and firms have said they have also trimmed their 
non-permanent, contract workforce.  Firms also warned that they 
expect additional layoffs and dismissals as export orders dry up and 
they begin to cut production lines.  The head of the Indonesian 
Employers Association, Sofyan Wanandi, has been quoted in the press 
as estimating as many as 500,000 to a million workers will lose 
their jobs by mid-2009.  In addition, there have been several 
reports of planned investment projects that have been reduced, 
deferred or canceled, given the uncertainty of future demand. 
 
4. (U) In a December 2 hearing before the House of Representatives, 
Sri Mulyani assured legislators the government was in the process of 
speeding up a fiscal stimulus package.  In addition to plans to 
provide businesses with tax relief worth an estimated IDR 12.5 
trillion in 2009, the government is trying to accelerate 
infrastructure spending aimed at maintaining domestic demand.  Other 
government efforts to ease problems stemming from tight credit 
 
JAKARTA 00002207  002 OF 003 
 
 
markets, including plans to provide additional trade finance, remain 
works in progress, with corresponding implementing regulations not 
yet in place. 
 
Takeover of Bank Century Has Raised 
Questions About BI Oversight 
- - - - - - - - - - - - - - - 
 
5. (SBU) The government's November 21 takeover of PT Bank Century 
Tbk has raised questions about the quality of Bank Indonesia 
oversight, as details behind Bank Century's liquidity difficulties 
emerged.  Bank Century's capital asset ratio fell from over 14% at 
end-September to -2.3% in mid-November due to the default of risky, 
non-rated securities held by the bank.  The bank's controlling 
shareholders also failed to provide additional needed capital, 
despite having reportedly guaranteed these risky securities with 
off-shore deposits.  Although Bank Century attempted to negotiate a 
sale of its assets, uncertainty about the bank's stability prompted 
the government's decision to have LPS, the Indonesian Deposit 
Corporation, take over the bank.  LPS has announced that it has 
already provided IDR 2.5 trillion (about $208 million) in temporary 
additional capital to the bank, bringing its capital asset ratio to 
about 10 percent.  Yet media reports through end-November detailed 
continued difficulties some depositors were experiencing in 
withdrawing deposits, particularly foreign currency deposits, from 
the bank. 
 
6. (SBU) Indonesian authorities have arrested Bank Century's founder 
and a major shareholders, Robert Tantular, on suspicions of unduly 
influencing bank operations.  The authorities also arrested the 
bank's former president-director for breach of banking regulations. 
BI has said it has sought the return of Bank Century assets 
reportedly held in the U.K. and Singapore.  Authorities are also 
seeking return of bank funds from two other controlling 
shareholders, who are not Indonesian nationals.  Meanwhile, analysts 
are predicting significant further consolidation in the banking 
sector as depositors move funds to larger, more stable financial 
institutions. 
 
BI Clarifies Recent Foreign Exchange Regulations, 
Reiterates Prohibition Against Speculative Activity 
- - - - - - - - - - - - - - - - - - - - - - - - - - 
 
7. (SBU) In the wake of continued rupiah weakness, Bank Indonesia 
(BI) issued on November 28 additional guidance regarding its recent 
foreign exchange regulations.  A circular letter reiterated the 
prohibition against the purchase of foreign exchange, in any amount, 
for speculative activities.  BI specified that speculative 
activities included the use of structured products that combine 
assets and foreign exchange derivatives for the sole purpose of 
enhancing investment returns. 
 
8. (SBU) A number of local market analysts welcomed moves aimed at 
tightening Indonesia's capital account, which they believe creates 
excessive vulnerability to short-term foreign exchange movements. 
However, BI Governor Boediono reiterated Indonesia's commitment to 
maintaining capital mobility in a statement on November 21.  Few 
market analysts expect authorities to impose significant new capital 
controls. 
 
Scrambling to Cover 2009 Budget Deficit 
- - - - - - - - - - - - - - - - - - - - 
 
9. (SBU) The government continues efforts to mobilize external 
financing to fund the 2009 budget deficit.  The World Bank is 
preparing a policy package for its contingent Development Policy 
 
JAKARTA 00002207  003 OF 003 
 
 
Loan (see reftel) and is continuing to engage in further discussions 
with the Asian Development Bank and Australia and Japan on 
co-financing.  The Ministry of Finance is also proceeding with plans 
for a retail sukuk (Islamic bond) issuance for end-February.  Plans 
for a global USD sukuk issuance, originally scheduled for late 2008, 
remain on hold given market conditions. 
 
Bakrie Group: Lack of Transparency of New 
Debt Deals Continues to Weigh on Market 
- - - - - - - - - - - - - - - - - - - - 
 
10. (U) The November 28 announcement by Bakrie & Brothers ("BNBR") 
management that it had entered into two deals which would resolve 
Bakrie Group debt problems has not eased the negative sentiment 
surrounding the troubled Group.  In a press release, BNBR announced 
it had reached agreement with Northstar Pacific to form a strategic 
partnership, transforming their previous sales and purchase 
agreement into a buyout arrangement to take over BNBR's 
collateralized assets from Oddickson Finance.  Northstar and BNBR 
plan to establish a joint venture company, which would own these 
collateralized assets. 
 
11. (SBU) While Northstar reportedly agreed to purchase $575 million 
in Bakrie Group debt owed to Oddickson, the Financial Times has 
reported that U.S. private equity firm Texas Pacific Group (TPG) had 
withdrawn from the deal, putting into doubt Northstar's ability to 
fund a debt purchase of that size.  Northstar management has denied 
TPG's withdrawal, but they have reportedly indicated its purchase of 
Bakrie Group debt may occur over time, with an initial purchase of 
perhaps $150 million.  Such a go-slow approach, if adopted, would 
suggest TPG is not willing to add additional capital beyond its 
original stake in the Northstar Pacific equity firm. 
 
12. (U) On November 28, local private equity firm Ancora Capital 
Management also reportedly reached agreement to assume BNBR's 
remaining $72 million debt to JP Morgan.  Press reports differ about 
whether Ancora will receive the Bumi Resources shares that had 
secured the loan.  BNBR's press release advised it had already 
settled most of its direct debt and would arrange to resolve the 
remaining debt of about $200 million, including debt owed to India's 
ICICI Bank ($101.5 million) and to other local firms ($81.5 million) 
by year's end.  Meanwhile, state-owned enterprise PT Tambang 
Batubara Bukit Asam announced that it would not participate in the 
Northstar deal. 
 
13. (SBU) Market reaction to the announcements of these developments 
has been mixed, with observers complaining about the lack of 
information on the structure of the strategic partnership and the 
division of share ownership.  Indonesia Stock Exchange management 
has requested BNBR to provide more information about its various 
agreements. 
 
HUME