VZCZCXRO1471
PP RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHJA #0264/01 0441144
ZNR UUUUU ZZH
P 131144Z FEB 09
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC PRIORITY 1488
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
INFO RUCPDOC/USDOC WASHDC 1557
RUCNASE/ASEAN MEMBER COLLECTIVE
RUEHKO/AMEMBASSY TOKYO 3018
RUEHBJ/AMEMBASSY BEIJING 5908
RUEHBY/AMEMBASSY CANBERRA 3592
RUEHUL/AMEMBASSY SEOUL 5376
RUEHGP/AMEMBASSY SINGAPORE 6450
RHEHNSC/NSC WASHDC
RUEAIIA/CIA WASHDC

UNCLAS SECTION 01 OF 03 JAKARTA 000264 
 
SENSITIVE 
SIPDIS 
 
DEPARTMENT FOR EAP/MTS, EAP/EP, EEB/IFD/OMA, E, EEB/IFD/ODF 
TREASURY FOR M.NUGENT AND T.RAND 
COMMERCE FOR 4430 BERLINGUETTE/KELLY 
DEPARTMENT PASS FEDERAL RESERVE SAN FRANCISCO FOR CURRAN 
SINGAPORE FOR S. BAKER 
TOKYO FOR R. KAPROTH 
 
E.O. 12958: N/A 
TAGS: EFIN ECON ETRD EINV ID
 
SUBJECT:  BANK INDONESIA CUTS RATES AND GOI PRESSES FOR STIMULUS AS 
GROWTH PROSPECTS DIM 
 
¶1. (SBU) Summary:  As the global economic slowdown deepens, 
Indonesian authorities are pushing both expansionary monetary and 
fiscal policies to support domestic demand and maintain positive 
economic growth.  With inflationary pressures subsiding, Bank 
Indonesia's (BI) February 4 decision to lower the overnight policy 
interest rate by 50 basis points to 8.25% was in line with 
expectations.  The government continues to press for quick approval 
of a proposed IDR 71.3 trillion (USD 6.1 billion, or 1.4% of GDP) 
fiscal stimulus, but some legislators are pushing for further 
spending increases.  To meet its financing requirements, the 
government has returned to capital markets and is finalizing 
multilateral and bilateral contingency financing.  Meanwhile, 
Indonesian exports fell by more than 20% year-on-year in December, 
with intra-regional trade off particularly sharply.  End summary. 
 
 
Easing Inflation Gives BI Scope to Cut 
- - - - - - - - - - - - - - - - - - - 
 
¶2. (SBU) BI's latest rate cut, the third in three months, came after 
the Consumer Price Index fell more than expected, to 9.17% y-o-y in 
January.  Deflation of 0.07% in January was largely due to recent 
government cuts in administered prices (subsidized fuels, 
electricity and transportation), rather than from across the board 
price declines.  The transportation, communications and financial 
services category declined by 2.53% m-o-m, while the housing, water, 
electricity, gas and fuel category fell by 0.06% m-o-m.  Food prices 
rose, however, with raw food up 0.76% m-o-m and prepared food up 
0.98% m-o-m.  Core inflation rose by 7.39% y-o-y, 0.44% m-o-m.  BI 
officials said they see further room to lower rates if inflation 
continues to fall.  The IMF res rep told Embassy on February 5 that 
expectations for inflation to slow to 5-6% by August are reasonable. 
 
 
Trade and Growth Prospects Deteriorate 
- - - - - - - - - - - - - - - - - - - - 
 
¶3. (U) As evidence of a deeper global economic downturn has 
accumulated, growth revisions are continuing to be revised downward. 
 The government reduced its 2009 growth forecast to 4.7%, while the 
IMF lowered its forecast to 3.5%.  BI's monetary policy statement 
acknowledged that the global economic slowdown was bearing down with 
increasing severity on Indonesia's tradables sector, but said 
performance of the non-tradables sector remained relatively stable. 
BI also reported signs of weaker growth, with bank lending and 
monetary aggregates moderating from high levels in the second half 
of 2008. 
 
¶4. (U) Economic weakness was also visible in sharply lower trade 
numbers and falling industrial production.  Indonesia's exports fell 
20.56% y-o-y in December, and 9.57% m-o-m to USD 8.69 billion (vs. 
November's decline of 2.3% y-o-y and 11.09% m-o-m).  Trade Minister 
Pangestu subsequently lowered the forecast for 2009 export growth to 
between 1 and 2.5%.  Exports of key commodities, including CPO and 
rubber, as well as manufactured goods such as mechanical appliances, 
all dropped by more than 20% m-o-m.  Apparel exports registered 
double-digit growth, while ores, slag and ash exports rose by 72%. 
Indonesian imports fell by slightly more than USD one billion (11.67 
%) to USD 7.7 billion in December.  While oil and gas imports fell 
by nearly 25% (to USD 983.3 million) for the month, non-oil and gas 
imports declined by 9.38% m-o-m to USD 6.7 billion.  Industrial 
production also fell by 3.4% in the fourth quarter (q-o-q).  The 
gloomy December trade stood in stark contrast with the 19.86% 
increase in exports (to USD 136.76 billion) for 2008, driven by 
record commodity prices earlier in the year.  The trade surplus for 
2008 narrowed to USD 8 billion (down from USD 40 billion in 2007). 
 
 
¶5. (U) Indonesia's trade with its Asian trading partners fell most 
sharply in December, giving little support to the hope that 
increased intra-Asian trade would offset falling trade with 
developed countries.  By sector, consumer goods and raw 
materials/intermediate goods both fell (from 6.91% to 6.48% and from 
 
JAKARTA 00000264  002 OF 003 
 
 
73.02% to 65.03% respectively), while capital goods as a share of 
total imports rose from 20.07% to 28.49%, driven by an increase in 
imports of aircraft to USD 769.9 million.  See Tables A and B below 
for more detailed breakdowns of December trade data. 
 
Rupiah Weakens, Reserve Assets Fall Slightly 
- - - - - - - - - - - - - - - - - - - - - - - 
 
¶6. (U) The rupiah has depreciated about 8% against the USD in 2009, 
slipping to IDR 11,800/USD.  BI has reportedly been intervening to 
prevent the rupiah from exceeding IDR 12,000/USD.  BI reported 
reserve assets fell to USD 50.9 billion as of end-January (from USD 
51.639 billion end-December), equivalent to 5.2 months' of imports 
and government foreign debt payments. 
 
GOI Pushing Fiscal Stimulus, Securing Financing 
- - - - - - - - - - - - - - - - - - - - - - - - 
 
¶7. (U) The Indonesian government is pushing hard for passage of its 
proposed expanded fiscal stimulus package of IDR 71.3 trillion 
(about 1.4% of GDP).  If approved, the stimulus package would 
increase the planned 2009 budget deficit to 2.5% of GDP.  The 
current stimulus proposal includes an estimated IDR 56 trillion in 
tax savings (including cuts in marginal income tax rates effective 
January 1 as a result of revision of the Income Tax Law),  tariff 
cuts and subsidies.  It also contains a relatively small new 
expenditure component, including an additional IDR 10.2 trillion for 
new infrastructure projects.  Some members of the legislative 
committees considering the proposal are pushing for even higher 
spending. 
 
¶8. (SBU) Authorities remain busy lining up financing for the 
proposed IDR 132 trillion deficit.  Acting Coordinator Minister for 
Economic Affairs and Finance Minister Sri Mulyani Indrawati said 
that the government had received assurances from multilateral and 
bilateral partners on contingency financing of USD 5-6 billion.  The 
World Bank Executive Board is scheduled to consider a contingency 
financing proposal for Indonesia (Development Policy Loan with 
Deferred Drawdown Option) in early March.  Embassy understands Japan 
is also poised to announce participation in the World Bank-led 
contingency financing effort, additional official development 
assistance of about USD 1 billion to Indonesia and an increase in 
funds available under the Chiang Mai Initiative. 
 
¶9. (U) The government held two successful domestic bond issuances in 
January (raising USD 823.5 million), concluded a private placement 
of debt valued at IDR 500 billion (about USD 42.9 million), and is 
carrying out a retail sukuk (Islamic bond) offering through February 
¶26.  Given strong demand, the government has doubled the target for 
the three-year, 12% coupon bond issuance (to IDR 3.4 trillion, about 
USD 290.6 million).  The government has also wrapped up a road show 
to assess investor interest in a USD 3 to 4 billion medium-term 
government note program. 
 
TABLE A 
------- 
Key trade results for Indonesia, December 2008: 
 
EXPORTS                   USD millions   change m-o-m 
 
   Fats/vegetable oils           835.6       -31.4% 
   Mechanical appliances         393         -20.3% 
   Rubber, rubber articles       340.2       -21.7% 
   Electrical machinery          621.6       -12.8% 
   Ores, slag and ash            457.5        72% 
   Apparel, not knitted          305.7        22.6% 
   Apparel, knitted              251.1        26.0% 
 
IMPORTS 
 
  Vehicles                       290.3      -43.3% 
  Mechanical appliances         1267.3      -12.5% 
  Iron and steel                 384.3      -23.6% 
 
JAKARTA 00000264  003 OF 003 
 
 
  Electrical machinery           915.2      -10.7% 
  Organic chemicals              197.9      -27% 
  Fertilizer                   166.5      -29.8% 
  Plastic, plastic articles      191.2      -24.4% 
 
TABLE B 
------- 
Indonesian non-oil and gas trade, by major trading partner: 
 
EXPORTS                    USD millions   change m-o-m 
 
Japan                         1,007.3        -11.1% 
Malaysia                        350.8        -22.8% 
China                           456.1        -14.3% 
Thailand                        162.9        -28.2% 
Australia                       134.5        -27.4% 
Singapore                       706.7         -2.7% 
U.S.                            907.0         -3.0% 
Taiwan                          254.2         15.1% 
South Korea                     329.4          3.8% 
EU                            1,249.7          1.2% 
 
IMPORTS 
 
Japan                       1,017.7           -17.2% 
Malaysia                      280.0            13.2% 
China                         871.5           -28.5% 
Thailand                      341.8           -40.9% 
Australia                     290.2            -3.0% 
Singapore                     702.5           -12.9% 
U.S.                          541.1             4.9% 
Taiwan                        139.2           -19.1% 
 
South Korea                   259.0           -26.3% 
EU                          1,094.7            54.1% 
 
(Statistics Indonesia) 
 
HUME