VZCZCXRO8485
PP RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHJA #0806/01 1271048
ZNR UUUUU ZZH
P 071048Z MAY 09
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC PRIORITY 2284
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
INFO RUCPDOC/USDOC WASHDC 1569
RUCNASE/ASEAN MEMBER COLLECTIVE
RUEHGP/AMEMBASSY SINGAPORE 6523
RHEHNSC/NSC WASHDC
RUEAIIA/CIA WASHDC

UNCLAS SECTION 01 OF 03 JAKARTA 000806 
 
SENSITIVE 
SIPDIS 
 
DEPARTMENT FOR EAP/MTS, EAP/EP, AND EEB/IFD/OMA 
SINGAPORE FOR S. BAKER 
TREASURY FOR M.NUGENT AND T.RAND 
COMMERCE FOR 4430 NADJMI 
DEPARTMENT PASS FEDERAL RESERVE SAN FRANCISCO FOR CURRAN 
 
E.O. 12958: N/A 
TAGS: EFIN ECON ETRD EINV ID
 
SUBJECT:  INDONESIAN MARKETS STRENGTHEN, DESPITE ELECTION SEASON 
JOCKEYING 
 
¶1. (SBU) Summary:  While Indonesia remains vulnerable to changes in 
global sentiment, markets here rallied strongly in recent weeks. 
Improved global sentiment lifted equity markets throughout the 
region; Indonesian markets benefited from positive current account 
news, increased capital inflows, falling inflation and continued 
monetary easing.  Local markets gained added momentum after peaceful 
legislative elections April 9 and the strong showing of President 
Yudhoyono's Democratic Party.  While coalition wrangling in advance 
of July presidential elections caused markets to pull back briefly, 
markets have rebounded strongly from 2009 lows registered on March 
¶2.  Since then, Indonesia's main equity index has risen by 46 
percent, the rupiah has appreciated by more than 12 percent against 
the U.S. dollar and yields on ten-year government bonds have fallen 
by more than 200 basis points.  Indonesia took advantage of an 
improved environment to issue its first dollar-denominated sukuk 
Islamic bond in the amount of $650 million on April 23, further 
easing government financing pressures.  Trade also improved in 
March, with exports higher by more than 20 percent over February and 
imports up by nearly 10 percent.  Exports and imports remain more 
than 30 percent lower in the first quarter of 2009 year-on-year. 
End summary. 
 
Markets Celebrate Democratic Party Legislative Gains, 
Pull Back on Coalition Jockeying, Rally Again 
- - - - - - - - - - - - - - - - - - - - - - - 
 
¶2. (U) The Indonesian stock market has surged 46 percent from its 
2009 low, recorded March 2.  The Jakarta Composite Index gained more 
than 11 percent during the week of April 13 alone, following the 
Democratic Party's strong showing in legislative elections.  The 
rupiah has also continued to strengthen, appreciating by over twelve 
percent against the U.S. dollar since March 2, and over six percent 
during the week of April 13 in a post-election bounce.  Although 
markets pulled back briefly after political jockeying over coalition 
formation for July's presidential election heated up, equity and 
currency markets have continued to strengthen, with the stock market 
recovering to levels last seen in mid-September and the rupiah 
reaching a six-month high against the U.S. dollar. 
 
Indonesia's First U.S. Dollar Global Sukuk Bond Issuance Draws 
Strong Demand and Further Eases Financing Pressure 
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - 
 
¶3. (U) Indonesia took advantage of improved market conditions to 
hold its initial dollar-denominated global sukuk (Islamic bond) 
offering.  Demand was strong for the five-year $650 million 
offering, which was oversubscribed by 7.3 times the amount of bonds 
available.  The bonds, issued April 23, were priced to yield 8.8 
percent, significantly lower than the 10.5 percent required when 
Indonesia issued five-year dollar-denominated notes in February. 
Indonesia's sukuk issuance was reported to be the first 
dollar-denominated sukuk since March 2008 and the largest since June 
¶2007.  Indonesia further diversified its sources of funding with the 
issuance.  The Finance Ministry reported the following investor 
distribution for the offering:  Middle East (30%); Indonesia (8%); 
other Asia (32%); Europe (11%) and U.S. (19%). 
 
¶4. (U) After front-loading bond issuances in early 2009, the 
government of Indonesia has already reached about 80 percent of its 
funding needs for the year.  Plans remain on tap to proceed with a 
JBIC-guaranteed, yen-denominated Samurai bond in the June timeframe. 
 
 
Monetary Easing Continues, As Inflation Slows 
More Quickly than Expected 
- - - - - - - - - - - - - - 
 
¶5. (U) Bank Indonesia (BI) has eased policy interest rates by 225 
basis points since December, with its latest 25 basis point rate cut 
to 7.25 percent on May 5.  Some market analysts view BI as likely 
nearing the end of its current cycle of monetary easing. 
International reserves rose to USD 56.67 billion at end-April, up 
from 54.8 billion at end-March (equivalent to 6.2 months of imports 
and servicing of official external debt).  In its monetary policy 
statement, BI said improvements in the global economic outlook had 
met with a positive response in global equity markets and a sharp 
drop in the risk premium spread.  This had encouraged resumption of 
capital inflows to emerging markets, including Indonesia, resulting 
 
JAKARTA 00000806  002 OF 003 
 
 
in appreciation of the rupiah, gains in the Indonesian equity market 
and improved government bond yields.  BI noted the global economy is 
expected to continue to shrink, albeit it at a slower rate. 
 
¶6. (U) BI maintained its forecast for 2009 economic growth in 
Indonesia of between 3 and 4 percent, supported by domestic demand 
and improving export performance, and inflation at the lower end of 
5-7 percent.  It said national banking conditions remained sound, 
with capital adequacy at 17.4 percent and non-performing loans below 
five percent.  Banking system liquidity, including liquidity in the 
inter-bank money market, has eased with growth in depositor funds. 
 
 
¶7. (U) Falling inflation has given BI additional room to cut policy 
interest rates to spur domestic demand and growth.  Consumer prices 
fell more quickly than the market expected in April, helped both by 
a stronger rupiah and a good harvest season.  Month-on-month 
deflation of 0.31 percent was driven by price declines in 
unprocessed food 
(-1.33 percent) and clothing (-1.70 percent).  Headline consumer 
prices fell to 7.31 percent year-on-year in April, down from 7.9 
percent y-o-y in March.  Core inflation fell to 7.14 percent. 
 
¶8. (U) While BI rates have declined significantly, banks have 
lowered lending rates only slightly, on continued credit quality 
concerns, as non-performing loans climbed to 4.5 percent in March. 
On April 17, BI revoked the license of a small commercial bank, IFI, 
after the bank failed to increase its capital to above the minimum 
capital adequacy ratio.  The bank, which represented only 0.01 
percent of domestic banking assets, was deemed not systemically 
important and is being liquidated by LPS (the Deposit Insurance 
Corporation). 
 
Trade Decline Moderates On Commodity Export Pick-Up 
- - - - - - - - - - - - - - - - - - - - - - - - - - 
 
¶9. (U) Indonesia's March trade figures provided the first glimmer of 
positive news on the trade front.  Exports and imports both rose on 
a monthly basis over February, with exports up nearly 21 percent and 
imports up nearly 10 percent.  The trade balance improved to a USD 2 
billion surplus, including bounded trade zones.  Exports rose to USD 
8.54 billion, from USD 7.08 billion in February, as volumes 
increased and prices improved for key commodities including coal and 
crude palm oil.  Rubber and rubber products and ores also registered 
significant gains, but textiles, footwear, electrical machinery and 
pearls and precious/semi-precious stone exports declined.  Total 
imports rose to USD 6.5 billion, from USD 5.9 billion in February. 
According to preliminary figures from Statistics Indonesia, all 
categories of imports increased in March over February, with 
consumer goods up 31 percent; raw materials/intermediate goods up 
7.4 percent; and capital goods up 11.8 percent.  Despite these 
monthly increases, for the first quarter 2009 as a whole, imports 
remain sharply lower than first quarter 2008, down almost 36 
percent.  A sectoral breakdown for the period shows that consumer 
goods declined by 33 percent; raw materials/ 
intermediates declined by 42 percent; and capital goods declined by 
3 percent. 
 
¶10. (U) Exports also remain well below 2008 levels, with first 
quarter 2009 (January-March) exports down by over 32 percent y-o-y. 
Oil and gas exports fell most sharply (down 55 percent, from USD 7.4 
billion to USD 3.3 billion) during the first quarter of 2009 y-o-y, 
followed by industrial exports (down 31.7 percent, from USD 22.4 
billion to 15.3 billion).  Agricultural exports rose slightly (up 
almost one percent, to USD 968 million from USD 959 million) while 
mining/other exports increased by nearly eleven percent (to USD 3.3 
billion, from USD 3 billion). 
 
¶11. (U) Indonesia's trade improved across trading partners in March. 
 Non-oil and gas exports rose to all major trading partners except 
Australia.  Non-oil and gas exports to the U.S. rose by less than 
one percent (to USD 808.5 million), while exports to China increased 
by over 51 percent (to USD 582.4 million), to the EU by almost 49 
percent (to USD 1.2 billion), and to Japan by 22 percent (to USD 
888.9 million).  Non-oil and gas imports rose from most major 
trading partners, including from the U.S., up by more than 8 
percent, to USD 609.7 million; China, up by almost 38 percent, to 
USD 1.05 billion; and Japan, up by almost 5 percent, to USD 698 
 
JAKARTA 00000806  003 OF 003 
 
 
million.  Imports from ASEAN partners rose by over 7 percent, to USD 
1.2 billion; imports from the EU fell by 2 percent, to USD 641 
million. 
 
Industrial Production:  Some Early Signs of Improvement 
- - - - - - - - - - - - - - - - - - - - - - - - - - - - 
 
¶12. (U) The current global economic slowdown has weighed on 
Indonesia's manufacturing sector.  The Indonesian Employers 
Association estimates that firms have dismissed 200,000-300,000 
employees since January.  Many were contract workers in the 
manufacturing sector.  Although industrial production declined in 
the first quarter of 2009 (falling by 1.61 percent q-o-q), there are 
some early signs of improvement as industrial production rose 
slightly in both February (up 0.24 percent m-o-m; 0.89 percent 
y-o-y) and March (0.77 percent m-o-m; 1.57 percent y-o-y), according 
to Statistics Indonesia.  The significant decline in raw material 
imports indicates industrial production is unlikely to rebound 
strongly soon, although rising industrial electricity consumption in 
March points to a possible pick-up in production. 
 
HUME