VZCZCXRO1351
PP RUEHCHI RUEHCN RUEHDT RUEHHM
DE RUEHJA #0393/01 0642358
ZNR UUUUU ZZH
P 052358Z MAR 09
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC PRIORITY 1753
RHEHNSC/NSC WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS COLL
RUEHBJ/AMEMBASSY BEIJING 5915
RUEHBY/AMEMBASSY CANBERRA 3607
RUEHLO/AMEMBASSY LONDON 0916
RUEHKO/AMEMBASSY TOKYO 3030

UNCLAS SECTION 01 OF 05 JAKARTA 000393 
 
SENSITIVE 
SIPDIS 
 
FOR EAP/MTS, EAP/EP, EEB/IFD/OMA, AND E 
TREASURY/IMF FOR MURDEN, MONROE AND BEASLEY 
TREASURY/IA FOR NUGENT AND RAND 
NSC FOR HENNESSEY-NILAND 
SINGAPORE FOR S. BAKER 
TOKYO FOR R. KAPROTH 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD EINV ID
SUBJECT: INDONESIA  -- INFORMATION IN ADVANCE OF G-20 
MEETINGS 
 
REF: (A) SECSTATE 17502 (B) JAKARTA 381 
 
¶1. (SBU) Summary:  The Indonesian government remains 
focused on protecting its economy from the effects 
of the global economic slowdown.  The government's 
economic team has moved nimbly to secure alternative 
financing to fund an expansionary budget, secure 
passage of a fiscal stimulus package and tap 
domestic and international capital markets despite 
significantly higher borrowing costs.  The 
principal challenge to Indonesia over the next few 
months will be to maintain domestic demand sufficient 
to support continued economic growth and to limit 
increases in unemployment and poverty. 
 
¶2. (SBU) Pressure on the balance of payments (BOP) 
through the capital account is viewed as the central 
financial risk, given Indonesia's relatively modest 
foreign exchange reserves, uncertainty about the 
size of corporate foreign debt maturing in 2009 
and the prospect of continued risk aversion for 
emerging market assets.  Indonesia remains reluctant 
to consider going to the IMF for BOP support.  A 
secondary concern is the growing impact of slower 
external and domestic demand on the Indonesia 
corporate and banking sectors.  End summary. 
 
SUMMARY OF KEY ISSUES 
- - - - - - - - - - - 
 
¶3. (SBU) Stimulus:  The legislature approved a fiscal 
stimulus package in the amount of IDR 73.3 trillion 
(about USD 6.1 billion, or 1.5% of GDP) on 
February 24, 2009.  The package is heavily weighted 
toward tax measures, including decreases in marginal 
income tax rates that became effective January 1. 
The package includes IDR 12.2 billion (USD 1 billion) 
in additional infrastructure spending.  Many observers 
question whether the government will be able to 
implement infrastructure spending (in both the 
stimulus program and the regular 2009 budget) quickly 
enough to boost domestic demand and mitigate job 
losses, given GOI capacity constraints in 
implementing these programs. 
 
¶4. (SBU) Financial Sector: Indonesian financial 
institutions largely avoided significant exposure 
to the bad assets weighing on many institutions' 
balance sheets.  The largest 15 banks are 
considered well-capitalized, but non-performing 
loans are rising and capital adequacy ratios 
declining.  Observers consider current pressures 
on the banking sector manageable, but the outlook 
on credit quality continues to deteriorate. 
On the regulatory front, Indonesian issued 
additional foreign exchange regulations to 
reduce speculation in late 2008.  Authorities 
have said they plan to issue additional regulations 
addressing off-shore products, including 
derivatives-related instruments in 2009.  The 
government has also delayed implementation of 
higher minimum capital levels for insurance 
companies, blaming current financial market 
conditions. 
 
¶5. (SBU) Real Economy: Indonesia has focused on 
supporting domestic demand to protect jobs and 
maintain economic growth.  With global demand 
weakening and concern about dumped imports 
increasing, the GOI implemented new import 
restrictions on five categories of goods (apparel, 
footwear, toys, electronics and food and beverages). 
The GOI limited the number of entry points for 
these goods to prevent "illegal" imports which 
could harm domestic firms employing Indonesian 
workers.  While Chinese imports appeared to be 
the primary target, the restrictions negatively 
 
JAKARTA 00000393  002 OF 005 
 
 
affected all imports in these categories.  The 
GOI has defended these regulations as WTO 
consistent.  See Jakarta 391 and Jakarta 69 
for additional reporting on other protectionist 
measures, views and government statements on the WTO. 
The dramatic decline in prices of key Indonesian 
commodity exports has also undermined economic 
growth and is expected to weigh on investment in 2009. 
 
¶6. (SBU) Social/Labor Impact: The fiscal stimulus is 
aimed at supporting domestic demand and limiting 
job losses.  Some significant layoffs in the textiles 
and manufacturing sectors have occurred, though 
most employers have avoided layoffs by cutting back 
on hours.  The Indonesian Employers Association has 
said that employers are trying to avoid widespread 
job losses until after legislative elections in 
April and presidential elections in July.  If the 
downturn deepens, however, more widespread job losses 
in 2009 are likely.  The government has increased 
funding to its main anti-poverty program (PNPM, 
National Community Empowerment Program), which 
provides block grants to communities, creating 
employment opportunities in areas such as 
small infrastructure projects. 
 
Few public protests relating to the economic crisis 
and government response have occurred, in part due 
to continuation of direct cash payments to poor 
families through February 2009.  A limited number of 
labor protests took place in late 2008 when the 
government attempted to limit increases in the 
minimum wage to the rate of forecast economic growth. 
 
¶7. (SBU) Dimension of the Crisis: GOI officials 
are concerned both about the depth and duration 
of the economic slowdown.  They are concerned about 
their ability to obtain affordable financing given 
the substantially higher interest rates demanded 
by capital markets for emerging market government 
bonds.  Indonesia has advocated on behalf of emerging 
markets for greater resources to be channeled through 
the multilateral development banks to support 
developing countries' government expenditures, 
consistent with medium-and long-term development 
priorities.  As co-lead of Working Group IV on 
reform of the multilateral development banks, 
Indonesia favors establishment of a Global Expenditure 
Support Fund which would assist developing countries 
in funding countercyclical spending.  The Working 
Group has not endorsed this proposal. 
 
¶8. (SBU) Role of the G-20:  Indonesia views the G-20 
as the right group of major developed  and developing 
countries to coordinate a response to the financial 
and economic crisis.  It has made a significant 
contribution to the process through its role as 
co-chair of Working Group IV.  See Jakarta 157 and 
2008 Jakarta 2058 for additional reporting on this 
issue. 
 
¶9. (U) Please see Jakarta 381 for responses to 
specific questions I(A) through (D). 
 
II. Impacts of the Global Financial Crisis: 
 
¶10. (SBU) Indonesian authorities are concerned about 
adequate access to U.S. dollar liquidity.  FM Wirajuda 
asked Secretary Clinton for USG assistance in obtaining 
a bilateral currency swap during her recent visit 
to Jakarta.  Japan recently doubled its bilateral 
currency swap with Indonesia through the Chiang Mai 
Initiative currency swap lines.  The amounts 
Indonesia could draw would be small absent an IMF 
program.  Bank Indonesia seeks to augment its foreign 
currency reserves in order to increase its ability 
to dampen rupiah volatility in the currency market 
 
JAKARTA 00000393  003 OF 005 
 
 
and to ease potential balance of payments concerns. 
Officials are also seized with the need to finalize 
Financial System Safety Net domestic legislation 
establishing a legal framework for handling crises 
involving systemically important financial institutions. 
A revised draft Financial System Safety Net law 
remains stalled in the legislature, after legislators 
rejected a framework established by government 
regulation. 
 
¶11. (SBU) The most important impact of the crisis 
on Indonesia's financial sector has been significant 
capital flight from Indonesian stock, bond and 
currency markets and resulting currency weakness. 
Reduced capital inflows and tight U.S. dollar 
liquidity have contributed to rupiah volatility, 
placing stress on smaller, less well-capitalized 
financial institutions.  Although the banking 
sector remains generally well-capitalized, a number 
of banks experienced significant derivatives-related 
losses following sharp depreciation of the rupiah. 
Analysts believe these losses are manageable and 
do not pose systemic risks.  Domestic bank NPLs 
have increased in recent months, reflecting pressure 
on Indonesia's commodities and manufacturing sectors. 
The Deposit Insurance Corporation took over one 
medium-sized bank, Bank Century, which received 
a capital injection of USD 208 million. 
 
¶12. (SBU) NPLs are expected to increase in 2009, 
given pressure on the corporate and consumer 
sectors.  Domestic lending to the corporate sector 
has declined, following robust 30 percent lending 
growth in 2008.  BI expects overall lending growth 
of 15 percent in 2009, although some private banks 
expect to limit loan growth to 5 to 10 percent. 
See Jakarta 227 for additional details on pressures 
on the banking sector. 
 
¶13. (SBU) Indonesian authorities have reacted 
to the crisis with a robust policy response. It 
quickly lined up contingency financing of about 
USD 5.5 billion from the World Bank and other 
development partners (Japan, Australia and the ADB) 
to fund an expanded budget deficit of 2.5% to 
support the expansionary fiscal measures described 
above.  Meanwhile, Bank Indonesia has significantly 
eased monetary policy, lowering its overnight policy 
rate by 175 basis points from December through March, 
to 7.75 percent, as inflationary pressures receded. 
For an extensive list of measures taken by the 
government (including a 20-fold increase in the 
deposit insurance guarantee), please see 2008 
Jakarta 2008.  Note: the proposed bailout of 
Bank Indonesia-owned Bank Indover did not occur, 
as the Indonesian legislature failed to formally 
approve the proposed bailout.  Netherlands banking 
authorities closed Indover and are in the process 
of resolving the institution.  See 2008 Jakarta 2207 
for information on the government takeover of 
and capital injection into Bank Century. 
 
III. The Broader Economic Crisis 
 
¶14. (SBU) The most important impact on Indonesia's 
real economy has been a significant slowdown in the 
six-plus percent economic growth rate Indonesia 
enjoyed in 2007 and 2008.  Without growth of six 
to seven percent, Indonesia cannot reduce its poverty 
and unemployment rates.  In the fourth quarter of 
2008, GDP declined by 3.6 percent (q-o-q).  Government 
efforts to mitigate the impacts of the economic 
crisis include the stimulus package and reductions 
in the price of subsidized fuels to improve purchasing 
power.  To alleviate the impact of slower growth on 
the poor, the government continued direct cash 
payments to poor households through February 2009. 
 
JAKARTA 00000393  004 OF 005 
 
 
It has also targeted subsidies to provide key 
products such as cooking oil at reduced prices. 
 
¶15. (SBU) Indonesia has also seen an accelerating, sharp 
decline in trade.  January exports fell by 36.08 percent 
on-year and 17.7 percent on month, after declines of 
20.56 percent (y-o-y) and 9.57 percent (m-o-m) in 
December and monthly double-digit declines in October 
and November.  Import declines have been comparable. 
January imports fell by 33.99 percent on year and 
17.63 percent on month.  Industrial production has 
also fallen, down 3.4 percent in the fourth quarter 
of 2008.  Government efforts to mitigate these 
impacts include the stimulus package, import 
restrictions and a nascent domestic goods promotion 
campaign.  Job losses, including among Indonesia's 
many migrant workers, are also increasing. See 
Jakarta 91, Jakarta 62 and 2008 Jakarta 2247 for 
additional reporting on employment and trade finance. 
 
¶16. (SBU) The crisis has affected Indonesia's outlook 
on trade and investment.  While many officials recognize 
an increased need to compete for foreign investment, 
other officials have embraced a more protectionist, 
nationalist stance.  These sentiments are reflected 
in the increased use of non-tariff barriers to reduce 
imports.  For example, Indonesia's Food and Drug 
Agency (BPOM) has begun applying more stringently 
regulations for imported food products.  See 
Jakarta 391 and Jakarta 69 on additional protectionist 
measures and 2008 Jakarta 2092 regarding new regulations 
on foreign exchange transactions.  On a more positive 
note, Embassy has seen a preview of proposed revisions 
to the Indonesian Investment Law which should improve 
Indonesia's overall investment regime.  The GOI has 
also provided limited tax incentives (reduced income 
tax rate, accelerated depreciation) for investment 
in specified sectors and/or regions.  See 2008 
Jakarta 1872. 
 
¶17. (SBU) Embassy is not aware of a local preference 
provision in the stimulus package, but we understand 
the government intends to issue implementing regulations 
to an existing Presidential Instruction mandating domestic 
products be purchased for any government procurement.  The 
government has not acted to spur devaluation of the rupiah 
to improve export competitiveness.  The government has 
publicly encouraged BI to maintain rupiah stability.  BI 
intervenes selectively to dampen rupiah volatility. 
 
IV. Near-term Outlook and Political/Foreign Policy 
Ramifications 
 
¶18. (U) Regarding the changing macroeconomic outlook, 
see Jakarta 264, Jakarta 106 and 2008 Jakarta 2300. 
Growth projections continue to be revised downward. 
The current consensus estimate for 2009 growth is 
3.5 percent, but several private-sector analysts 
predict growth will fall to between 1.9 and 2.6 percent. 
Inflationary pressures have moderated, with BI 
expecting inflation to fall to 5 to 7 percent in 
2009, from 8.6 percent on-year in February, well off 
the peak of over 12 percent in September.  After 
firming in December, the rupiah has weakened again 
in recent weeks, trading at around IDR 12,000/USD. 
The biggest economic challenge facing Indonesia in 
2009 is maintaining sufficient domestic demand to 
support positive economic growth and prevent a 
large increase in poverty and unemployment.  The 
government has accessed domestic and capital markets 
in 2009, but has had to offer significantly higher 
interest rates than in 2008. 
 
¶19. (SBU)  Potential political ramifications for Indonesia 
in this election year include how voters view the 
Yudhoyono administration's management of the economic 
crisis.  A deep economic downturn could harm SBY's 
 
JAKARTA 00000393  005 OF 005 
 
 
re-election chances, with more populist/nationalist 
candidates benefiting.  The administration's strong 
policy response to the crisis reflects the significant 
concerns they have about this possibility.  See 
2008 Jakarta 2319 for additional information. Closer 
economic cooperation within the ASEAN plus three 
grouping may signal greater reliance on regional, 
rather than multilateral institutions, and on 
regional partners.  However, these regional programs 
are still being developed.  They have not yet 
distributed support funds and remain contingent on 
an IMF program for access to large-scale report. 
Regarding social ramifications of the crisis, a 
deeper downturn could provoke demonstrations such 
as those which occurred in May/June 2008 following 
the government's unpopular fuel price hike.  The 
government has been able to respond to such incidents 
with measures, such as direct cash payments to the 
most vulnerable families, that have alleviated 
underlying pressures.  Another factor buffering 
social pressure stemming from an economic downturn 
is the flexibility of the Indonesian labor market. 
Laid-off workers are able to earn income, albeit 
meager wages, in Indonesia's large informal sector. 
 
¶20. (SBU) Regarding government criticism of the 
United States for its role in the crisis, Indonesian 
government officials, including President Yudhoyono and 
Finance Minister Sri Mulyani Indrawati, have frequently 
described the crisis as a financial tsunami which 
originated elsewhere, sometimes citing the U.S. 
specifically and sometimes referencing developed 
markets more generally.  Indonesia is portrayed 
as an innocent victim hit by the turmoil.  While 
officials have criticized lapses in regulatory 
oversight of complex financial instruments related 
to the financial crisis, they have generally 
refrained from overly harping on the United States and 
its role in the crisis.  Some GOI officials, such as 
Sri Mulyani and Trade Minister Pangestu, have publicly 
taken relatively nuanced approaches on the "Buy America" 
provision, noting it had little impact on Indonesia 
or likening it to the kind of promotion of domestic 
goods Indonesia is beginning to undertake itself. 
 
¶21. (SBU) The economic downturn may create some 
bilateral irritants with Indonesia's neighbors, e.g. 
with Malaysia if large numbers of Indonesian migrant 
workers are dismissed, and with China, with whom 
Indonesia has a number of commercial disputes 
which appear linked to the economic crisis (e.g. 
stalled Chinese financing of power plant projects 
and a dispute over an Indonesian state-owned 
enterprise's purchase of Chinese aircraft).  Embassy 
does not expect these irritants to become more 
serious issues which change Indonesia's foreign or 
security policy. 
 
¶22. (U) Source of foreign assistance:  the GOI is 
not a significant donor of foreign assistance, so 
the crisis does not impact its ability/commitment 
to sustain foreign assistance levels. 
 
¶23. (SBU) Impact on government support for global 
peacekeeping operations/commitments to NATO operations: 
We do not expect the economic crisis to affect 
Indonesia's small, but important contribution to 
peacekeeping operations, although it may prompt the 
GOI to request more foreign funding of such assistance. 
The GOI may be more reluctant to assume more peacekeeping 
missions, however, absent additional foreign support. 
 
HUME