VZCZCXRO8658
PP RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHJA #0091/01 0160954
ZNR UUUUU ZZH
P 160954Z JAN 09
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC PRIORITY 1260
INFO RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUCPDOC/USDOC WASHDC 1552
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC
RUCNASE/ASEAN MEMBER COLLECTIVE
RUEHKO/AMEMBASSY TOKYO 2977
RUEHBJ/AMEMBASSY BEIJING 5853
RUEHBY/AMEMBASSY CANBERRA 3538
RUEHUL/AMEMBASSY SEOUL 5349
RUEHGP/AMEMBASSY SINGAPORE 6426
RHEHNSC/NSC WASHDC
RUEAIIA/CIA WASHDC

UNCLAS SECTION 01 OF 05 JAKARTA 000091 
 
SENSITIVE 
SIPDIS 
 
DEPARTMENT FOR EAP/MTS, EAP/EP, EEB/IFD/OMA, EEB/EPPD, E, 
EEB/IFD/ODF, F (FOR JAMES MARTIN) 
USAID/ASIA/AA FOR MARGOT ELLIS 
USAID/EGAT/AA FOR MARK SILVERMAN 
TREASURY FOR M.NUGENT AND T.RAND 
COMMERCE FOR 4430 BERLINGUETTE/KELLY 
DEPARTMENT PASS FEDERAL RESERVE SAN FRANCISCO FOR CURRAN 
DEPARTMENT PASS EXIM BANK 
SINGAPORE FOR S. BAKER 
TOKYO FOR R. KAPROTH 
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: EAID EFIN ECON ETRD EINV ID
 
SUBJECT: INDONESIA - ASSESSING IMPLICATIONS OF GLOBAL FINANCIAL 
CRISIS FOR U.S. BILATERAL ASSISTANCE PROGRAMS 
 
REFS:  (A) 08 State 134905 (B) Jakarta 62 
       (C) 08 Jakarta 2008 (D) Jakarta 69 
 
¶1. (SBU) Summary:  As the global financial crisis unfolds, 
Indonesia's experienced economic team is acting quickly to implement 
a broad policy response aimed at stabilizing local financial markets 
and to secure standby financing from the World Bank, Asian 
Development Bank and bilateral donors.  Although the financial 
crisis affected primarily Indonesia's wealthy in 2008, second round 
effects are expected to grow in 2009 -- an election year -- and 
affect more Indonesians.  Accordingly, the government is 
increasingly focused on how it can minimize impacts on the real 
economy, particularly on employment and poverty.  It is too soon to 
assess whether measures such as a recently announced fiscal stimulus 
package and steps to improve access to trade finance will be 
effective in off-setting reduced global demand and supporting 
continued economic growth. 
 
¶2. (SBU) Summary continued.  Clearly, a sharp economic downturn has 
serious implications for our assistance efforts.  With nearly half 
the population of the country living on less than two dollars a day, 
the social, political and economic ramifications of a downturn 
cannot be isolated.  There are potential new demands for social 
services and safety nets, and, depending on the nature of the 
downturn, even emergency assistance.  Ongoing progress across the 
portfolio of our investments from security to basic services to 
efforts to support Indonesia's new democracy could all suffer if GOI 
revenues and donor resources fall or are redirected to more urgent 
consumption requirements.  This in turn would delay and possibly 
threaten the consolidation of Indonesia's transformation.  If 
necessary, we want to be able to adjust our interventions to be more 
nimble and targeted but this could require considerably more 
flexibility than is now provided by the F process.  To date no major 
adjustments are required but things could unravel quickly.  We will 
continue contingency planning.  If there are additive resources, 
there are opportunities to use them here as part of a proactive 
exercise to put in place quick response mechanisms that can deliver 
highly specialized technical assistance on financial and social 
problems and perhaps targeted safety net support.  End summary. 
 
GOI Undertakes Broad Policy Response to Financial Crisis 
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - 
 
¶3.  (U) The Indonesian government met the financial crisis with a 
prompt, broad policy response, which post has extensively reported. 
A summary of actions taken prior to end-October was reported via 08 
Jakarta 2008.  Subsequent government policy responses were reported 
via:  Jakarta 62, Jakarta 31, 08 Jakarta 2247, 2007, 2206, 2140 and 
¶2092. 
 
Real Economy Impacts Expected to Become More Acute in 1H09 
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 
 
¶4. (U) Although domestic consumption is the primary driver of 
Indonesia's economy, the outlook for economic growth deteriorated 
when commodity prices plunged and demand for Indonesia's exports 
fell sharply in late 2008.  While the government remains optimistic 
that its fiscal stimulus package and planned large infrastructure 
spending will help Indonesia achieve economic growth of 4.5-5.5% in 
2009, most market analysts have reduced growth forecasts to 3-4%. 
This is well below recent annual growth rates of more than 6%.  As 
real economy impacts -- including defaults by wholesale buyers of 
commodity and non-commodity shipments, production cuts and job 
losses -- have spread, the Indonesian government began increasing 
 
JAKARTA 00000091  002 OF 005 
 
 
its focus on cushioning the real economy from the impact of the 
financial crisis, in an effort to avoid widespread job losses and a 
rise in poverty rates.  (Please see Jakarta 62, 08 Jakarta 2247 and 
08 Jakarta 2207 for additional information). 
 
Trade and Investment Impacts:  Lower Global Demand and Financing 
Constraints Exacerbate End of Commodity Bubble 
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - 
 
¶5. (U) As reports spread regarding liquidity constraints and the 
increased difficulty of Indonesian exporters to obtain needed trade 
finance, the Government of Indonesia announced measures to expand 
available trade finance and accelerate exporters' receipt of export 
proceeds.  Bank Indonesia issued regulations, effective December 5, 
which provided for the opening of a window through which commercial 
banks could sell export receivables (valued at least USD 10,000 or 
equivalent and denominated in USD, yen, pound sterling, euro, 
Australian dollars and Swiss francs) to BI, under certain conditions 
(i.e., irrevocable letter of credit with remaining term of 30-90 
days, and already accepted by the overseas accepting bank). 
 
¶6. (U) On January 9, the Ministry of Trade announced issuance of a 
new regulation (01/M-DAG/PER/1/2009), effective March 5, 2009, which 
requires (1) the use of Letters of Credit (L/C) for exports of 
various primary commodities, including crude palm oil, cocoa, 
coffee, rubber, tin and other specified mining products, and (2) the 
deposit of these export proceeds in on-shore banks.  Trade Minister 
Pangestu characterized the measure as an effort to protect exporters 
from non-payment and as a way to ensure Indonesia's access to needed 
foreign exchange. 
 
¶7. (U) Press reports and anecdotal evidence suggest that a number of 
foreign and domestic investors have chosen to delay, cancel or scale 
down planned investment in Indonesia as commodity prices have 
plunged and the outlook for global demand for products such as 
textiles, garments and footwear remains uncertain. 
 
¶8. (U) There have also been press reports citing the National 
Commission for Placement and Protection of Indonesian Migrant 
Workers announcing that some 250,000 Indonesian migrant workers have 
returned home from Malaysia, South Korea, Hong Kong and various 
Middle Eastern countries as a result of the financial crisis and 
growing global economic downturn.  With an estimated 5.8 million 
Indonesians working abroad in recent years, providing at least IDR 
60 trillion (over USD 6 billion) in remittances, a significant 
return of migrant workers from abroad would boost unemployment and 
place additional strains on the domestic economy.  A return of 
internal migrant workers into Java from other islands, notably 
Kalimantan and Sumatra, reportedly is also occurring as a plunge in 
commodity prices has forced some plantations to scale down 
production. 
 
Financial Sector Impacts 
- - - - - - - - - - - - - 
 
¶9. (U) BI advises that while Indonesian banks remain relatively well 
capitalized, the level of non-performing loans will increase in 
¶2009.  Banking regulation and supervision has improved markedly 
since the 1997/98 crisis.  The IMF has provided a resident banking 
advisor to assist in this effort.  Recent bank failures such as that 
of BI-owned Bank Indover in the Netherlands in October and Bank 
Century in Indonesia in November have raised questions about whether 
BI has sufficient resources to carry out effective supervision 
beyond Indonesia's largest banks.  In recent years, BI has relaxed 
 
JAKARTA 00000091  003 OF 005 
 
 
some prudential regulations in an effort to encourage bank lending. 
Credit growth subsequently rose by more than 30% in 2008. 
 
Government Revenue Growth Expected to Moderate in 2009, 
But GOI Committed To Preserving Pro-Poor Spending 
- - - - - - - - - - - - - - - - - - - - - - - - - 
 
¶10. (U) Indonesia enjoyed high revenue growth for most of 2008, with 
tax revenues up 40% in 2008, as the government took extensive 
efforts to increase the number of tax registrations and taxpayers. 
The effects of the global economic slowdown became visible in the 
fourth quarter of 2008, with lower imports resulting in lower VAT 
and luxury tax revenues.  Over-performance of revenue targets 
allowed the GOI to trim the 2008 budget deficit to 0.1% of GDP (from 
a planned deficit of 2.1% of GDP).  In late-2008, the Indonesian 
government revised the 2009 state budget, recognizing that 
government revenues, including tax and non-tax revenues, were likely 
to decline as a result of the economic slowdown and sharply lower 
commodity prices.  The government adjusted downward state revenues 
and grants from IDR 1,022.5 trillion to IDR 985 trillion and trimmed 
the planned budget deficit to 1.0% of GDP (down from the original 
planned budget deficit of 1.9%).  On January 13, the government 
provided a broad outline of proposed budget revisions it will 
present to the legislature, based on changed macroeconomic 
assumptions (see septel).  Finance Minister Sri Mulyani Indrawati 
said that the proposed revisions, which would increase the budget 
deficit to 2.5% of GDP (IDR 132 trillion), reflect a significant 
decline in expected state revenues and the need for counter-cyclical 
fiscal stimulus.  Other Ministry of Finance officials said the 
government plans to maintain a net bond issuance target of IDR 54.7 
trillion. 
 
¶11. (U) The Indonesian government announced a halt of bond issuance 
in October, when rising risk aversion increased yields on Indonesian 
bonds by 800 basis points.  Credit market conditions have since 
improved, with yields on Indonesian government bonds falling from a 
high of 20.9% in late-October to 11.9% in early January (on 
benchmark ten-year bond).  These improved conditions should support 
the government's 2009 bond issuance.  The government resumed 
rupiah-denominated bond issuance on January 13, when it raised IDR 
5.95 trillion (USD 531.7 million), nearly double its target, from 
the auction of Treasury bills maturing in 2010 and fixed rate bonds 
maturing in 2012 and 2014.  The Finance Ministry has also announced 
plans to issue a retail sukuk (Islamic bond) in early February and a 
Japanese-yen denominated Shibosai bond by no later than mid-2009. 
Indonesia also plans to move forward with the issuance of a global 
USD sukuk bond, originally scheduled for late 2008, but has not yet 
announced a date. 
 
¶12. (U) Despite some constraints on government revenues, the 
Indonesian government has taken specific measures focused on 
Indonesia's most vulnerable, including extending through February 
2009 direct cash transfer payments for poor households and plans to 
increase funding for programs such as the National Community 
Empowerment Program, which provides short-term employment on 
community road-building and other small community infrastructure 
projects.  Other government measures, such as recent cuts in 
subsidized fuel prices, while popular, primarily benefit 
middle-income and wealthy Indonesians.  In response to slowing 
economic growth, the government of Indonesia has also announced 
plans for a significant stimulus package.  Although the amount of 
the package appears a moving target, most officials have spoken of a 
IDR 50.5 trillion (USD 4.6 billion) stimulus package, consisting of 
IDR 12.5 trillion included in the 2009 budget and about IDR 38 
 
JAKARTA 00000091  004 OF 005 
 
 
trillion in unspent 2008 budget funds.  This stimulus is in addition 
to an estimated $9.2 billion in new infrastructure projects, 
intended to boost domestic demand, competitiveness and employment. 
 
GOI Acts Quickly to Secure Alternative Financing 
- - - - - - - - - - - - - - - - - - - - - - - 
 
¶13. (SBU) Indonesian officials moved quickly to secure alternative 
external financing to cover the 2009 budget deficit when bond market 
conditions deteriorated.  This was essential for reassuring currency 
and credit markets.  At the government's request, the World Bank has 
led efforts to secure stand-by financing.  Bilateral donors 
Australia and Japan have been primary partners in this effort. 
France also reportedly agreed to provide budget support through 
climate change-related assistance.  President Yudhoyono and other 
officials continue to reject publicly any consideration of seeking 
access to IMF financing, including its new Short-term Lending 
Facility, due to ongoing ill will from the Asian financial crisis 
period. 
 
¶14. (SBU) Post is carefully monitoring the impact of the global 
financial crisis on ongoing and other development activities.  Thus 
far, the GOI appears to be managing the crisis well and deleterious 
impacts on development activities have been minimal.  Mission is not 
aware of significant problems and/or weaknesses due to the financial 
crisis identified by other donors regarding development activities 
or of specific additional proposed new assistance beyond the World 
Bank-led effort described above. 
 
U.S. Assistance Focused on Helping Indonesia Succeed 
- - - - - - - - - - - - - - - - - - - - - - - - - - - 
 
¶15. (SBU) U.S. assistance to Indonesia targets an array of critical 
challenges faced by the country.  Most of the assistance is centered 
on ensuring that the remarkable ongoing transformation here 
continues in the right direction at a steady pace.  Clearly, an 
economic downturn complicates that prospect.  Investments in 
security, education, health, the environment, economic growth and 
democratic governance all have benefitted from Indonesia's recent 
robust economic growth but the experience here after the financial 
crisis of 1997 is still in people's mind. 
 
¶16. (SBU) And the lessons of that crisis underline some of the ways 
in which a large economic shock can quickly impact both society and 
assistance investments.  Indonesia is not at such point now, but 
experience also suggests that things could change quickly, 
underlining the need for continued contingency planning. 
 
¶17. (SBU) Some examples of how such a downturn could affect ongoing 
activities are suggested by some USAID investments in the economic 
sector.  Many of those activities seek to stimulate improvements in 
the climate for business, to enhance Indonesia's competitiveness and 
to stimulate strong growth in jobs.  One byproduct of the current 
global financial crisis which has already impacted this portfolio is 
seen in work with the Ministry of Trade, previously a champion of 
reform in the GOI.  Pressures of the current crisis and the 
atmosphere in the run up to the national elections have led to 
increasingly protectionist attitudes and actions (see Ref D and 
septel reporting on these measures).  Similarly, on the jobs front, 
the downturn has encouraged regions benefitting from Indonesia's 
decentralization efforts to impose trade constricting actions 
internally. 
 
¶18. (SBU) Aside from continuing to monitor the situation, the 
 
JAKARTA 00000091  005 OF 005 
 
 
mission is working on a new approach to future investments which 
will better embed these concerns.  Mission will likely give higher 
priority to strengthening institutional capacity to identify and 
remove key constraints to trade and investment, increasing 
productivity of high-value agricultural sub-sectors, and enhancing 
growth of safe and sound non-bank financial institutions (NBFIs). 
Similar kinds of ramifications are being assessed across the rest of 
the current and planned portfolio.  One possible critical constraint 
from the USG side is that when and if a crisis hits and does so 
suddenly, current programming policies under the F process are 
rigid, exceptionally cumbersome and time consuming. 
 
¶19. (SBU) With these caveats in mind, the mission does not consider 
that the impacts of the financial crisis will significantly affect 
the intended results of ongoing bilateral assistance programs in the 
near term.  The mission does not believe the financial crisis poses 
significant new risks for the success of ongoing programs. 
 
¶20. (SBU) Resources:  While additive resources to address these 
issues are not needed currently, the situation could change quickly 
and we need to be prepared.  We expect to continue monitoring, but a 
source of flexible funds, either from reprogramming or new money, 
would be vital to enable us to be responsive to urgent requests for 
technical assistance and to bolster existing social safety nets. 
 
HEFFERN