VZCZCXRO0573
RR RUEHCHI RUEHCN RUEHDT RUEHHM
DE RUEHJA #2300/01 3540857
ZNR UUUUU ZZH
R 190857Z DEC 08
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 1025
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 2874
RUEHBJ/AMEMBASSY BEIJING 5756
RUEHBY/AMEMBASSY CANBERRA 3434
RUEHUL/AMEMBASSY SEOUL 5253
RUEHGP/AMEMBASSY SINGAPORE 6405
RUEAIIA/CIA WASHDC

UNCLAS SECTION 01 OF 02 JAKARTA 002300 
 
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: IMF AND WORLD BANK CAUTIOUSLY OPTIMISTIC ABOUT INDONESIAN 
ECONOMY 
 
¶1. (SBU) Summary.  The IMF resident representative and World Bank 
country director are cautiously optimistic about Indonesia's ability 
to manage the economic impact of the global financial crisis.  In a 
December 18 lunch hosted by Ambassador Hume, World Bank country 
director Joachim von Amsberg and IMF resident representative Milan 
Zavadjil cited Indonesia's strong economic team, sound macroeconomic 
policies, healthy banking system, and large domestic economy as key 
factors in Indonesia's ability to absorb the global downturn.  They 
warned, however, that the global crisis is likely to intensify in 
2009, leading to increased unemployment in Indonesia and putting 
additional stress on the banking and corporate sectors.  Indonesia's 
ability to deal quickly and effectively with emerging cases of 
corporate or bank failure will be critical to maintaining investor 
confidence, according to IMF Resident Representative Zavadjil.  The 
World Bank is considering significantly increasing its assistance to 
Indonesia.  End Summary. 
 
Indonesia in Strong Position to Weather Crisis 
--------------------------------------------- 
¶2. (SBU) Indonesia is in a stronger position than most emerging 
market economies to deal with the impact of the global financial 
crisis, according to von Amsberg and Zavadjil.  Indonesia's economic 
team, led by Coordinating Minister for the Economy Sir Mulyani 
Indrawati, recognized the need to secure financing for the 2009 
budget early on in the global financial crisis.  Under Minister 
Mulyani's leadership, Indonesia was one of a small number of 
countries that sought budget support from the World Bank prior to 
the onset of serious domestic economic distress.  Indonesia also had 
low public debt levels entering the crisis due to the fiscal 
prudence of the economic team, giving it the flexibility to conduct 
countercyclical fiscal policy. 
 
¶3. (SBU) The representatives generally lauded the Government of 
Indonesia's (GOI) macroeconomic response to the crisis, citing their 
injection of liquidity into the banking system, decision to reduce 
intervention in the foreign exchange markets as reserves began to 
fall too rapidly, and measured approach to monetary easing.  The 
strength of Indonesia's large banks will also help support the 
country as global demand for Indonesian products falls, according to 
both institutions.  Preliminary data for October 2008 indicate 
steady and low nonperforming loan levels, strong net interest 
margins and continued strong credit growth, according to Zavadjil. 
The representatives also cited the large size of Indonesia's 
domestic economy and the current robust level of domestic demand as 
key factors softening the impact of flagging export growth. 
 
Downside Risks to Test Government 
--------------------------------- 
¶4. (SBU) Despite Indonesia's strong economic foundations, both 
institutions expect the impact of the global financial crisis on the 
Indonesian economy to intensify in the next six months.  Zavadjil 
noted that there is a significant shift in deposits from smaller to 
larger banks, putting pressure on the small bank sector.  Although 
small bank failures are unlikely to cause an immediate systemic 
banking collapse, he warned that the mishandling of bank failures 
could spark a collapse in depositor confidence.  Both 
representatives also speculated that a series of corporate failures 
involving well-connected Indonesians that the GOI fails to resolve 
in a transparent manner would trigger another wave of international 
investor retreat from Indonesia. Zavadjil also noted that the size 
and trading volumes of Indonesian equity, bond and currency markets 
have fallen significantly, allowing one or two large market players 
to have a significant impact on prices. 
 
¶5. (SBU) Both institutions expect growth to slow considerably in 
2009, but neither envisions massive capital flight or a balance of 
payments crisis.  They noted that they personally believe that their 
respective institutions' growth forecasts for 2009, 4.4% (World 
Bank) and 5.5% (IMF), are overly optimistic.  Their outlook for 
 
JAKARTA 00002300  002 OF 002 
 
 
unemployment and wages in Indonesian has also deteriorated in recent 
weeks, as global demand for Indonesian products continues to slump. 
Recent press reports that neighboring countries are returning large 
numbers of Indonesian workers will also exacerbate the unemployment 
picture in 2009. 
 
World Bank Evaluating Large Increase in Assistance 
--------------------------------------------- ----- 
¶6. (SBU) World Bank Country Director Joachim von Amsberg noted that 
his institution is evaluating a significant increasing in its 
assistance to Indonesia.  The World Bank believes that its 
assistance can make a major impact in Indonesia because of the 
government's commitment to economic reform and the strategic 
importance of the country.  Indonesia is one of a small number of 
countries that the bank is considering for the large increase in 
funding. 
 
HUME