VZCZCXRO4972
PP RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHJA #0415/01 0691006
ZNR UUUUU ZZH
P 101006Z MAR 09
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC PRIORITY 1782
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
INFO RUCPDOC/USDOC WASHDC 1560
RUCNASE/ASEAN MEMBER COLLECTIVE
RUEHKO/AMEMBASSY TOKYO 3036
RUEHBJ/AMEMBASSY BEIJING 5920
RUEHBY/AMEMBASSY CANBERRA 3613
RUEHUL/AMEMBASSY SEOUL 5383
RUEHGP/AMEMBASSY SINGAPORE 6472
RHEHNSC/NSC WASHDC
RUEAIIA/CIA WASHDC

UNCLAS SECTION 01 OF 04 JAKARTA 000415 
 
SENSITIVE 
SIPDIS 
 
DEPARTMENT FOR EAP/MTS, EAP/EP, EEB/IFD/OMA, E, EEB/IFD/ODF 
TREASURY FOR M.NUGENT, T.RAND AND L. QUINN 
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 EAID ID
 
SUBJECT:  INDONESIA'S GROWTH SLOWDOWN, BALANCE OF PAYMENT PRESSURES 
 
REFS:  (A) Jakarta 91 (B) Jakarta 311 
 
Sensitive But Unclassified.  Not for Internet Distribution. 
 
¶1. (SBU) Summary:  Indonesia's economic growth is slowing as the 
global economic downturn has become more entrenched.  Market 
consensus expects a growth slowdown (current IMF forecast is 3.5 
percent), rather than recession, for 2009.  The macroeconomic 
situation remains broadly stable, though pressure on the balance of 
payments (BOP), through the capital account, is viewed as the 
central risk to the economy given relatively modest foreign exchange 
reserves and uncertainty about the size of foreign currency debt in 
the corporate sector maturing in 2009.  Analysts are also concerned 
about an increase in non-performing loans in Indonesian banks, given 
the deteriorating economic environment.  Officials described their 
efforts to line up fiscal support through the contingency financing 
package led by the World Bank (with contributions from the ADB, 
Japan and Australia) and balance of payments support through the 
Chiang Mai Initiative currency swap lines.  Although most 
interlocutors recognized the limits of a proposed World Bank-led 
contingency financing package to help Indonesia weather a balance of 
payments crisis, they stressed that the Indonesia government would 
not seek assistance from the International Monetary Fund in this 
election year.  End summary. 
 
¶2. (SBU) Treasury Director for South and Southeast Asia Malachy 
Nugent, Regional Financial Attache Susan Baker and econoff met with 
officials from the Indonesian Finance Ministry, Bank Indonesia (BI), 
IMF, World Bank and the private sector on February 18-19 to discuss 
Indonesia's current economic performance and the outlook for 2009 
and to assess three areas of potential vulnerability:  BOP, 
financial and fiscal. 
 
Economic Growth Down, But Better than Most, With Risks 
To Balance of Payments 
- - - - - - - - - - - - 
 
¶3. (SBU) Effects from the continued global economic downturn are 
visible in slowing domestic demand, sharply lower trade and 
declining bank lending.  Local IFI officials and market observers 
believe Indonesia is most likely to experience a growth slowdown, 
rather than a more serious economic downturn, in 2009.  In the 
current global environment, forecast economic growth of 3.5 percent 
may be enough for Indonesia to record the third highest growth in 
the G-20, following China and India, as a number of analysts are 
predicting.  Whether Indonesia will be able to maintain sufficient 
domestic demand to support 3.5 percent growth remains uncertain. 
Authorities have pursued monetary and fiscal expansion to support 
domestic demand, but difficulties in implementing rapid spending and 
continued currency weakness may limit the effectiveness of these 
policies.  Ministry officials expressed disappointment that 
political opposition had prevented extension of the most effective 
form of fiscal stimulus - direct cash payments to targeted poor 
families - beyond February. 
 
¶4. (SBU) IFI and Finance Ministry officials briefed that a lack of 
confidence continues to hamper capital markets.  None of the 
officials or analysts consulted believed that Indonesia faces a BOP 
crisis now.  However, most cited pressure on the BOP, through the 
capital account, as the central risk facing Indonesia.  Of 
particular concern are relatively large private-sector 
foreign-currency loan repayments due in 2009.  While the full extent 
of these repayments is uncertain, Bank Indonesia officials estimated 
them at USD 17.4 billion, with an estimated 30 percent involving 
loans from parent or affiliated companies and another 50 percent 
involving foreign borrowings by foreign companies that may have 
greater access to credit lines and refinancing. 
 
¶5. (SBU) The IMF res rep said he does not see risks in the current 
account or the trade account, arguing that most imports are capital 
goods and raw materials that respond quickly to reduced demand. 
While Indonesia has lost important terms of trade gains made during 
the commodities boom, contacts believed that most producers in key 
 
JAKARTA 00000415  002 OF 004 
 
 
sectors such as crude palm oil and coal remain profitable.  A 
knowledgeable private-sector analyst expects the trade balance to be 
in modest surplus (about USD one billion per month) in 2009. 
 
¶6. (SBU) Nugent and Baker briefed Finance Ministry officials on 
recent USG actions in response to the economic slowdown, including 
the fiscal stimulus package and initiatives to improve credit market 
liquidity and deal with troubled assets on bank balance sheets.  GOI 
officials urged the USG to provide additional information on these 
initiatives at the upcoming G-20 meeting in London, particularly for 
the benefit of those members outside the G-7.  They expressed some 
concern about the risk that emerging markets will be crowded out of 
capital markets given increased U.S. and other developed country 
borrowing. 
 
Rupiah Weakness A Constraint on Further Monetary Easing; 
Bilateral Currency Swaps Helpful, But Not Enough 
- - - - - - - - - - - - - - - - - - - - - - - - - 
 
¶7. (SBU) Indonesia remains vulnerable to capital flight and changes 
in sentiment by both foreign investors and, to a greater degree, by 
Indonesians.  Interlocutors disagreed about the extent of the risk 
of further capital flight, but most agreed that reduced capital 
inflows have left BI as the only major supplier of foreign currency. 
 Given its relatively modest foreign exchange reserves, market 
participants have questioned BI's ability to support the currency, 
although BI has reportedly stepped up intervention in recent weeks 
to prevent the rupiah from exceeding IDR 12,000/USD.  At best, BI is 
likely to be able to dampen short term rupiah volatility, but not 
alter the underlying trend.  The IMF res rep believes BI will 
continue to allow the rupiah to depreciate gradually.  Several 
market observers also view continued rupiah weakness as a 
significant limitation on BI's ability to ease monetary policy 
further.  BI officials advised that they see the overnight policy 
rate in the 7 to 8 percent range as inflation continues trending 
down.  Private-sector analysts note that the current round of 
monetary easing has been relatively less effective at supporting 
economic growth due to banks' current reluctance to expand credit. 
Indonesian bank credit growth was one of the highest in the region 
in 2008 at 30 percent.  BI officials hope that banks will continue 
to growth their loans in 2009, although at a more moderate rate of 
15 to 18 percent expansion. 
 
¶8. (SBU) BI officials briefed on plans to increase bilateral 
currency swaps under the ASEAN plus 3 Chiang Mai Initiative (CMI) 
and reiterated Indonesia's interest in exploring similar swap 
facility arrangements with the U.S. Federal Reserve to provide a 
further cushion for the BOP.  Private-sector analysts noted that the 
conclusion of enhanced bilateral swap arrangements through the CMI, 
while helpful, provides limited additional resources, since 
Indonesia can only access up to 20 percent of the swap lines without 
an IMF program in place. 
 
¶9. (SBU) Private-sector analysts commented that Indonesia's economic 
team had adopted a sound approach in maintaining macroeconomic 
stability.  BI's November decision to require evidence of underlying 
transactions in the purchase of foreign exchange had reduced 
speculation in currency markets.  The new foreign exchange rules 
also appear to have kept some funds from entering Indonesia and 
prompted some Indonesians to hold deposits in dollars, rather than 
rupiah.  These analysts also believed that efforts to require 
exporters to obtain letters of credit from domestic banks (see Ref 
A) would put Indonesian companies at a competitive disadvantage. 
They also cited as an example of unhelpful protectionism proposed 
GOI initiatives that would require oil and gas companies operating 
here to make all Indonesia-related payments through banking accounts 
established with Indonesian national commercial banks. 
 
The Financial Sector:  Pressures Largely Manageable, But 
New Financial System Safety Net Law Needed 
- - - - - - - - - - - - - - - - - - - - - - 
 
¶10. (SBU) BI officials expect non-performing loans levels to rise 
slightly (from 3.9 percent in December to 5 to 6 percent in 2009) 
 
JAKARTA 00000415  003 OF 004 
 
 
and capital adequacy ratios to decline slightly (from 16 percent to 
14 percent), but pressures remain manageable.  BI expects loan 
growth to fall from 30 percent in 2008 to 15-18 percent in 2009, and 
deposit growth to reach 10-12 percent.  Dollar liquidity remains 
tight, while rupiah liquidity has eased, with many banks moving 
extra funds into BI certificates and government bonds.  World Bank 
staff noted that while some banks had experienced derivative losses 
related mostly to commodity positions, they do not believe the 
amounts are large enough to pose a systemic risk.  Private-sector 
analysts agreed that banks remain well capitalized, particularly the 
top 15 banks which hold more than 2/3 of all deposits.  They 
confirmed there has been a migration of deposits to larger banks 
from smaller banks, some of which need to increase capital or merge 
with other institutions.  Finance Ministry officials and World Bank 
officials agreed that while some companies (such as the Bakrie 
Group) were overexposed after borrowing heavily (primarily from 
foreign lenders in the case of Bakrie), most banks had remained 
fairly conservative and were now stepping up scrutiny of new 
lending. 
 
¶11. (SBU) BI officials and private-sector analysts stressed the need 
for swift approval of the government's new revised draft Financial 
System Stability Net, following the legislature's rejection of the 
initial law in December.  Without it, BI and the Finance Ministry 
have insufficient tools to manage a significant banking crisis. 
 
Financing the Deficit:  More Details About World Bank-led Contingent 
Financing Proposal 
- - - - - - - - - - - - - - - 
 
¶12. (SBU) World Bank officials told us the proposed financing 
package for Indonesia (subsequently approved March 3) is unique 
given its contingent nature and briefed on why they believe the 
government needs this instrument under current conditions.  World 
Bank staff described the current macroeconomic context as sound and 
not in need of fundamental adjustment.   Bank staff said the USD 2 
billion Public Expenditure Support Facility (PESF) Development 
Policy Loan with Deferred Drawdown Option (DPL-DDO), augmented by 
USD 3.5 billion in contingency financing from the Asian Development 
Bank, Japan and Australia, will improve Indonesia's ability to 
finance its budget and maintain macroeconomic growth.  Bank staff 
advise that the package is likely to be most successful if global 
and domestic liquidity improves, with the DPL-DDO providing the 
market with increased confidence in Indonesia's ability to meet its 
financing needs, without need for any draw-down.  The "insurance 
value" of the package had already calmed markets to some extent, in 
the view of Bank staff.  Even if capital markets remain tight and 
Indonesia is unable to meet its capital market financing targets and 
draw from the facility, Bank officials view it as an important 
resource to maintain priority spending. 
 
¶13. (SBU) Finance Ministry officials confirmed their intention is to 
go capital markets first, with a focus on domestic markets, to meet 
their financing needs, including a fiscal stimulus equal to 1.5 
percent of GDP.  MOF officials said they will seek access to the 
contingent financing facility only if capital markets are 
essentially closed.  Continued macroeconomic stability is a 
prerequisite for access to the funding and the World Bank will 
consult with the IMF will on this issue.  The Bank, other donors, 
and the GOI intend to meet quarterly to determine whether the GOI 
has been able to meet its quarterly financing plan at a reasonable 
cost.  If there is a shortfall and conditions are met indicating 
that markets were effectively closed (i.e. financing available only 
at rates exceeding historical financing costs by a defined 
significant margin), the World Bank and the other development 
partners would cover the shortfall.  MOF Debt Management officials 
advised that if there is a gap under their quarterly target, they 
would draw first on the ADB budget loan, to be disbursed on a 
quarterly basis, and then divide any remaining gap among other 
development partners.  They advised the ADB Board would consider the 
loan during the second week of April.  They also briefed on Japan's 
plans to provide a guarantee on an Indonesian yen-denominated 
Samurai bond (reported Ref B). 
 
 
JAKARTA 00000415  004 OF 004 
 
 
Domestic Bond Issuance Remains Strong, As GOI Poised to 
Go to International Markets When Conditions Permit 
- - - - - - - - - - - - - - - - - - - - - - - - - 
 
¶14. (SBU) Officials and private-sector analysts all agreed that 
Indonesia continues to have good access to domestic and foreign 
capital markets, and underscored Indonesia's successful tapping of 
domestic capital markets in early 2009 and preparations to re-enter 
global capital markets when conditions are favorable.  Finance 
Ministry Debt Management officials noted a series of successful 
domestic auctions in January and February and the successful 
issuance of its first retail sukuk (Islamic bond) in February. 
Strong demand allowed the Ministry to triple its initial target and 
it raised IDR 5.556 trillion (USD 464.9 million).  Prior 
preparations for a Global Medium-Term Notes (GMTN) issuance program 
will position the GOI to take advantage of market opportunities and 
issue up to USD 4 billion in 2009 and 2010.  Officials also noted 
that unused 2008 budget funds of IDR 51 trillion (USD 4.7 billion) 
had helped keep the government's cash management position in good 
shape. 
 
The Need To Improve GOI-IMF Relations 
- - - - - - - - - - - - - - - - - - - 
 
¶15. (SBU) Interlocutors across the board stressed that the 
Indonesian government would not go to the International Monetary 
Fund for assistance in this election year.  The IMF resident 
representative suggested that Indonesia might be more likely to 
consider coming to the Fund if the new IMF Short-term Lending 
Facility were converted into a contingent facility, rather than one 
that required immediate drawing.  He said the G-20 and IMF Board are 
discussing this issue.  Improving GOI-IMF relations is needed, as 
World Bank officials and other observers acknowledge that if a 
larger macroeconomic crisis develops, Indonesia would need to look 
to the IMF and/or try to secure additional currency swaps. 
 
Asking for U.S. Support in the G-20 and Elsewhere 
- - - - - - - - - - - - - - - - - - - - - - - - - 
 
¶16. (SBU) Finance Ministry officials urged the USG to support a 
capital increase for the ADB to help emerging economies manage the 
fallout of the global economic crisis.  They requested USG support 
in the G-20, where Indonesia is co-leading Working Group IV on 
reform of multilateral development banks. 
 
¶17. (U) U.S. Treasury Nugent and Baker cleared cable. 
 
HUME