VZCZCXRO2104
PP RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHJA #0031/01 0081030
ZNR UUUUU ZZH
P 081030Z JAN 09
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC PRIORITY 1175
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
INFO RUCPDOC/USDOC WASHDC 1549
RHMFISS/DEPT OF ENERGY WASHINGTON DC
RUCNASE/ASEAN MEMBER COLLECTIVE
RUEHKO/AMEMBASSY TOKYO 2929
RUEHBJ/AMEMBASSY BEIJING 5806
RUEHBY/AMEMBASSY CANBERRA 3487
RUEHUL/AMEMBASSY SEOUL 5304
RUEHGP/AMEMBASSY SINGAPORE 6413
RHEHNSC/NSC WASHDC
RUEAIIA/CIA WASHDC

UNCLAS SECTION 01 OF 03 JAKARTA 000031 
 
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 EAGR ID
 
SUBJECT:  BANK INDONESIA CUTS RATES 50 BASIS POINTS TO BOLSTER 
GROWTH, AS INFLATION EASES AND EXPORTS (AND IMPORTS) CONTINUE TO 
SLIDE 
 
Ref: 08 Jakarta 2206 
 
¶1. (SBU) Summary:  Bank Indonesia (BI) reduced the overnight policy 
interest rate by 50 basis points, to 8.75%, on January 7, surprising 
markets which had expected a quarter-point cut.  The move is aimed 
at supporting economic growth, which BI forecasts will slow to 4-5% 
in 2009.  The rate cut followed the easing of consumer price 
inflation in December to 11.06% y-o-y (and deflation of 0.04% 
m-o-m), lower inflation expectations and recent firming of the 
rupiah, which had strengthened by over 10% against the USD since 
BI's December 4 rate cut.  Indonesian exports continued to slide on 
weak demand for commodities, falling 11.09% m-o-m in November. 
Imports fell by 17.87% m-o-m for the same period, resulting in an 
improved trade balance of USD 890 million for the month.  The 
rupiah, which had firmed on January 7 in advance of the rate cut, 
strengthened further after the cut, though pulled back slightly in 
mid-day trading on January 8.  End summary. 
 
Lower Inflation Eases Way for More Aggressive Rate Cut 
- - - - - - - - - - - - - - - - - - - - - - - - - - - 
 
¶2.  (U) BI's more aggressive 50 basis point cut extended monetary 
easing begun in December, when BI lowered rates by an initial 25 
basis points.  BI's monetary policy statement advised that to 
counterbalance risks in 2009, monetary policy should focus on 
promoting economic growth, while continuing to safeguard medium-term 
inflation and financial sector stability.  It noted domestic 
inflationary pressure had steadily eased in recent months in 
response to falling world commodity, food and energy prices, high 
levels of domestic food production in 2008 and a slowing of 
aggregate demand, giving BI added room to reduce rates.  The rupiah, 
which had rallied by more than 10% since BI's December 4 rate cut, 
had strengthened on January 7 in advance of the latest cut, and 
firmed further following it.  The rupiah closed at IDR 10,863/USD 
(BI average rate) on January 7 and strengthened to IDR 10,805/USD in 
late trading.  On January 8, the rupiah pulled back slightly, 
trading at IDR 10,940/USD mid-day. 
 
¶3. (U) Consumer price inflation (CPI) slowed to 11.06% 
y-o-y in December, registering a 0.04% drop m-o-m.  This was an 
improvement over November CPI rates of 11.68% y-o-y and 0.12% m-o-m. 
 BI lowered its forecast for 2009 CPI to 5%-7%, down from 6.5-7.5%. 
While Indonesia's inflation rate is falling more slowly relative to 
most other countries in the region, December CPI came in lower than 
analyst expectations of 11.38% y-o-y.  December consumer price 
deflation stemmed from two government decreases of subsidized fuel 
prices (by 8.3% on December 1 and 9.1% on December 15), which drove 
down prices in the transportation, communications and financial 
services category by 2.74%. Inflation expectations had also 
moderated in recent weeks.  BI's monetary easing came on the heels 
of marked improvement in Indonesia's bond market, where yields have 
fallen by 500 to 650 basis points across the yield curve since early 
November.  On January 7, yields on the 10-year benchmark domestic 
bond closed at 11.11%. 
 
International Reserves Up, Bank Credit Growth Down 
- - - - - - - - - - - - - - - - - - - - - - - - - - 
 
¶4. (U) BI reported reserve assets increased to USD 51.639 billion at 
the end of December (up from USD 50.18 billion at end-November), 
equivalent to 4 months' of imports and government foreign debt 
payments.  BI expects reserve assets will total USD 51 billion at 
year-end 2009, equivalent to 4.7 months' of imports and government 
foreign debt payments.  Growth in bank credit eased from 37.1% in 
 
JAKARTA 00000031  002 OF 003 
 
 
October to 30.2% y-o-y in December (based on preliminary data).  BI 
expects bank credit growth to moderate in 2009 to between 18-20%. 
BI cautioned that the global financial crisis and the world economic 
slowdown would weigh on Indonesia's banking sector in 2009, but 
reported that key capital adequacy (CAR) and non-performing loan 
(NPL) ratios remain satisfactory.  CAR has dropped to 14.3% (down 
from 16% in October) and NPLs are forecast to trend higher in 2009, 
with the expected level to reach about 5% (which would be a 
significant increase over the most recent NPL levels of 3.9%). 
 
Monetary Policy Easing Welcomed As Needed Complement 
To Government's Fiscal Stimulus Package 
- - - - - - - - - - - - - - - - - - - - 
 
¶5. (U) The business community welcomed BI's more aggressive monetary 
easing.  The business community had been clamoring for significant 
rate cuts to spur domestic demand and to complement government 
action to stimulate the economy, including an expanded fiscal 
stimulus package of IDR 50.5 trillion (USD 4.6 billion) announced by 
President Yudhoyono on January 4.  Some local market analysts and 
bankers have questioned whether the BI rate cut will lead to a 
quick, corresponding decline in deposit and lending rates, as the 
interbank market continues to face liquidity imbalances and lack 
confidence. 
 
Exports and Imports Continue To Slide in November 
- - - - - - - - - - - - - - - - - - - - - - - - - 
 
¶6. (U) The growing global economic slowdown continues to weigh on 
Indonesian exports and imports.  Statistics Indonesia reported total 
exports were down 11.09% 
m-o-m in November (and down 2.3% y-o-y), to USD 9.61 billion, 
following a decline of 11.61% m-o-m in October. 
Key export results (on m-o-m basis) included: 
 
     Rubber     -27% 
     Mineral fuels/oil products    -19.5% 
     Electrical machinery          -13.4% 
     Mechanical appliances         -11% 
     Fats/vegetable oils           -3.7% 
 
     Apparel, not knitted)         +25% 
     Apparel, knitted              +14% 
     Footwear                      +18.9% 
 
Exports for the period January - November 2008 were 24.17% higher 
y-o-y. 
 
¶7. (U) Indonesian imports fell 17.87% in November, to USD8.72 
billion.  Key import results (on m-o-m basis) included: 
 
     Iron and steel                -33.5% 
     Cereals                       -66% 
     Electrical machinery          -18.6% 
     Organic chemicals             -35.2% 
     Mechanical appliances         -12.4% 
 
The November trade balance improved to USD 890 million (up from a 
USD 200 million surplus recorded in October).  BI has forecast that 
Indonesian export and import performance will continue to weaken in 
2009, resulting in a projected current account deficit of about 
0.11% of GDP. 
 
¶8.  (U) Export weakness extended broadly across most trading 
 
JAKARTA 00000031  003 OF 003 
 
 
partners, with non-oil and gas exports to Japan, Taiwan, ASEAN, and 
Europe declining by 18%, 23%, 9% and 7.6% m-o-m respectively. 
However, non-oil and gas exports to the U.S., China and Australia 
rose by 1.4%, 8.6% and 6% m-o-m respectively.  Non-oil and gas 
imports from the U.S. declined by 24%. 
 
HEFFERN