VZCZCXRO5418
PP RUEHCHI RUEHCN RUEHDT RUEHHM
DE RUEHJA #0062/01 0130937
ZNR UUUUU ZZH
P 130937Z JAN 09
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC PRIORITY 1215
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS COLL
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC
RUEHKO/AMEMBASSY TOKYO 2952
RUEHBJ/AMEMBASSY BEIJING 5830
RUEHBY/AMEMBASSY CANBERRA 3513
RUEHUL/AMEMBASSY SEOUL 5326
RUEHGP/AMEMBASSY SINGAPORE 6418
RUEAIIA/CIA WASHDC
RHEHNSC/NSC WASHDC

UNCLAS SECTION 01 OF 04 JAKARTA 000062 
 
SIPDIS 
SENSITIVE 
 
DEPT FOR E, EAP/MTS, EAP/EP, EEB/IFD/OMA AND EEB/EPPD 
TREASURY FOR IA/MALACHY NUGENT AND TRINA RAND 
USAID/ASIA/AA FOR MARGOT ELLIS 
USAID/EGAT/AA FOR MARK SILVERMAN 
COMMERCE FOR 4430/KELLY 
DEPT PASS FEDERAL RESERVE SAN FRANCISCO FOR CURRAN 
DEPARTMENT PASS EXIM BANK 
SINGAPORE FOR SUSAN BAKER 
TOKYO FOR ROBERT KAPROTH 
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: INDONESIA WEATHERING GLOBAL FINANCIAL CRISIS SO FAR, BUT 
GROWING IMPACT ON REAL ECONOMY WILL CHALLENGE IN 2009 
 
REFS: A) 08 State 134459  B) Jakarta 31 
      C) 08 Jakarta 2300  D) 08 Jakarta 2247 
      E) 08 Jakarta 2207  F) 08 Jakarta 2092 
      G) 08 Jakarta 2002 H) 08 Jakarta 1987 
 
¶1. (U) This message includes an action request.  Please see 
paragraph 12. 
 
¶2. (SBU) Summary.  Effective policy responses have enabled Indonesia 
to weather the current financial crisis.  IMF and World Bank 
officials here are cautiously optimistic about Indonesia's ability 
to absorb the global downturn and do not expect a balance of 
payments crisis.  To date, the financial crisis has primarily 
affected Indonesia's wealthy, limiting the potential for social 
instability.  Analysts anticipate second round effects of the 
financial crisis will challenge Indonesia in 2009, with slowing 
external and domestic demand resulting in rising job losses.  The 
dramatic decline in prices of commodity exports also threatens 
investment and employment in the resources sector.  Upcoming 2009 
elections raise the risk that some fiscal policies may do little to 
improve Indonesia's long-term economic growth prospects. 
Indonesia's role in the G-20 response to the global financial crisis 
provides an opportunity for increased U.S. engagement with Indonesia 
as a strategic partner.  End summary. 
 
Effective Policies Stave off Larger Crisis 
- - - - - - - - - - - - - - - - - - - - - - 
 
¶3. (U) The global financial crisis threw Indonesia's financial 
markets into turmoil, sending stock, bond and currency markets down 
precipitously.  Indonesia's benchmark equity index had lost 50.6% of 
its value (yoy) as of December 31, 2008, as investors exited 
emerging market stocks.  While large, this decline was in line with 
other equity markets in the region; the Malaysian, Thai, and 
Vietnamese indices fell by 38.9%, 47.6% and 66.0% respectively 
during the same period.  Indonesian government bond yields also 
soared in 2008, increasing by nearly 800 basis points from 
mid-September to end-October, before partially recovering in 
December.  Ten-year government bonds traded at a yield of 11.64% as 
of December 30, 2008, up 160 basis points from one year earlier. 
The Indonesian Rupiah (IDR) depreciated rapidly in response to 
global market instability and rising aversion to emerging market 
assets.  The IDR breached 13,000/USD on November 21, before 
recovering to 11,000/USD in December.  The IDR/USD rate remained 
14.1% (yoy) below the value recorded in December 2007.  Interbank 
lending among Indonesian banks and dollar financing in Indonesia 
also slowed significantly in late 2008 as losses and rising risk 
aversion among large international banks spread to the Indonesian 
financial sector. 
 
¶4. (SBU) The GOI's relatively strong macroeconomic position prior to 
the onset of the global financial crisis and rapid response to 
financial market turmoil helped stave off more significant financial 
market volatility and supported stabilization and a modest recovery 
of financial markets at year's end.  Indonesia entered the crisis 
with low debt-to-GDP levels (35% of GDP in 2007, down from 80% in 
2000), strong economic growth momentum and domestic demand (GDP 
growth exceeded 6.0% (yoy) for the past 8 quarters), and a healthy 
banking sector.  Since September 2008, the GOI has injected 
liquidity into financial markets, adjusted 2009 fiscal spending 
requirements, and worked to secure standby financing from the World 
Bank and other bilateral sources. 
 
¶5. (SBU) Bank Indonesia (BI)'s measured monetary policy response to 
the crisis also reinforced confidence in Indonesia's economic team. 
In contrast to other countries in the region, BI has only slowly 
 
JAKARTA 00000062  002 OF 004 
 
 
begun lowering rates.  It reduced the overnight policy rate by 25 
basis points to 9.25% in early December, its first cut in 2008, 
balancing the need to stimulate growth, fight high inflation and 
support a weak IDR.  On January 7, BI cut the policy rate by an 
additional 50 basis points, to 8.75%, after the rupiah had firmed by 
more than 10%.  BI significantly decreased its defense of the IDR in 
late 2008 in an effort to preserve foreign exchange reserves.  After 
official reserve assets fell by more than USD 6.5 billion in 
October, reserve assets stabilized, increasing to over USD 51.6 
billion at end-December, up about USD 1.46 billion from 
end-November. 
 
Few Signs of Social Instability 
- - - - - - - - - - - - - - - - - 
 
¶6. (SBU) The current financial crisis has primarily affected 
Indonesia's wealthy, limiting the catalysts for social instability. 
The concurrent decline in food and energy prices and moderation in 
overall inflation has eased pressure on middle and low-income 
families.  Overall food prices fell 0.12% between October and 
November 2008 and the price of rice, which comprises as much as 
one-third of total household spending in Indonesia, is down almost 
7% from its 2008 peak.  Sharply lower global oil prices allowed the 
government to reduce the price of subsidized fuel, lowering 
transportation costs.  As a result, consumer confidence and 
confidence in the government have risen during the latter half of 
2008, despite the onset of the global financial crisis.  Consumer 
confidence retreated slightly in December after reaching an 11-month 
high in November, indicating that the weakening economy has had a 
limited impact on consumers.  A small number of labor demonstrations 
occurred following a government attempt to cap regional minimum wage 
contract increases to the forecast rate of economic growth.  The 
government subsequently modified its position, linking wage 
increases to the inflation rate.  To date there have been no signs 
of rising social tension toward the Chinese-Indonesian minority or 
the government. 
 
More Severe Impact on Real Economy Expected 
in Early 2009 
- - - - - - - 
 
¶7. (SBU) Analysts anticipate that the second round effects of the 
global financial crisis will create significant economic challenges 
for Indonesia in 2009, slowing growth and raising unemployment.  The 
World Bank recently lowered its 2009 growth forecast to 4.4%, and 
cautioned that it may fall further due to continued uncertainty 
about the global economy.  Most market analysts are more bearish 
about Indonesia's 2009 growth prospects and have reduced GDP growth 
projections to 3-4%, as global demand for Indonesian products 
continues to slump.  In addition to weak external demand, the prices 
of Indonesia's commodity exports have plunged, threatening 
investment and employment in the resources sector, particularly in 
areas outside Java.  Some observers warn that Indonesia could lose 
more than one million jobs in the formal sector before the end of 
¶2009. 
 
¶8. (SBU) The banking sector may also come under new pressure in 
2009, with rising non-performing loans and higher funding costs 
limiting the potential for investment growth.  Indonesian 
authorities are handling fall-out from two banking failures which 
occurred since the onset of the financial crisis:  the takeover of 
BI-owned Bank Indover by Netherlands banking authorities in October 
and the first takeover by Indonesian authorities of a large 
commercial bank (Bank Century) since the 1997/98 financial crisis in 
November.  Small banks in Indonesia have already faced rapidly 
rising funding costs, as deposits shift from smaller to larger 
 
JAKARTA 00000062  003 OF 004 
 
 
banks.  Although small bank failures are unlikely to cause an 
immediate systemic banking collapse, a series of small bank failures 
could test depositor confidence in the banking system as a whole. 
Despite the outlook for significantly slower growth, IMF and World 
Bank officials here are cautiously optimistic in Indonesia's ability 
to absorb the global economic downturn and very few analysts 
envision massive capital flight or a balance of payments crisis in 
Indonesia in 2009. 
 
2009 Election May Prompt Short-term Policy Focus 
- - - - - - - - - - - - - - - - - - - - - - - - - 
 
¶9. (SBU) On January 4, President Yudhoyono announced plans to 
introduce a larger fiscal stimulus package  aimed at supporting 
domestic demand and stemming job losses as the growth outlook 
deteriorates.  The IDR 50.5 trillion (USD 4.6 billion) stimulus 
package includes IDR 12.5 trillion included in the 2009 budget and 
about IDR 38 trillion in unspent 2008 budget funds.  This stimulus 
is in addition to $9.2 billion in new infrastructure projects and a 
$1.6 billion commuter train project in Jakarta financed by a 
Japanese government loan.  The actual impact of the stimulus package 
is questionable:  the Indonesian government may not have the 
capacity to spend the money quickly enough to have an impact. 
Yudhoyono also announced that the government plans to raise funds in 
international bond markets to finance additional spending 2009.  His 
priorities for 2009 are job creation, inflation control and 
corruption eradication. 
 
¶10. (SBU) The proximity of the 2009 elections and the GOI's 
inability to spend money quickly raises the risk that the government 
will pursue policies with maximum short-term benefit rather than 
measures to promote sustainable job-creating growth.  The government 
has already increased import restrictions and begun rigorously 
enforcing non-tariff barriers in an effort to preserve foreign 
currency and protect domestic business.  The government's fiscal 
stimulus package includes incentives for the corporate sector (tax 
breaks and access to trade finance).  The government has not yet 
released details on the recently announced IDR 38 trillion stimulus. 
 Pressure to support domestic firms in the name of economic 
nationalism has been on the rise, as revealed by the government's 
support for the ailing Bakrie Group.  The government has extended a 
direct cash transfer program for poor households through February 
2009 and cut subsidized fuel prices to blunt the impact of slower 
growth on low-income households.  While popular and effective in 
alleviating short-term poverty, these programs do little to promote 
long-term economic growth.  Lack of institutional capacity in the 
government could undermine policies with longer-term impact, such as 
the government's plan to expand the education budget or to double 
infrastructure spending. 
 
New Global Role Provides Opportunity 
To Strengthen Partnership 
- - - - - - - - - - - - - 
 
¶11. (SBU) Indonesia's role in the G-20 response to the global 
financial crisis provides an opportunity for increased U.S. 
engagement with Indonesia as a strategic partner.  As co-chair (with 
France) of the G-20 working group tasked with reforming the World 
Bank and Regional Development Banks, Indonesia is in a position to 
play a constructive role in strengthening the international 
financial system.  However, Indonesia has limited experience in 
leading a G-20 working group and could benefit from consultations 
with U.S. officials.  By engaging Indonesia on this and other global 
financial sector issues, the U.S. can shift the focus of its 
engagement with Indonesia from donor-recipient to strategic 
partner. 
 
JAKARTA 00000062  004 OF 004 
 
 
 
¶12. (SBU) ACTION REQUEST:  Post recommends that a senior Treasury 
official meet with the Indonesian team working on the G-20 proposal 
prior to the G-20 summit in April 2009. 
 
HEFFERN