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Viewing cable 09JAKARTA882, INDONESIA - GROWTH SLOWS, BUT STILL FASTEST IN SOUTHEAST

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Reference ID Created Released Classification Origin
09JAKARTA882 2009-05-22 06:16 2011-08-24 01:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Jakarta
VZCZCXRO0611
PP RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHJA #0882/01 1420616
ZNR UUUUU ZZH
P 220616Z MAY 09
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC PRIORITY 2378
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
INFO RUCPDOC/USDOC WASHDC 1573
RUCNASE/ASEAN MEMBER COLLECTIVE
RUEHGP/AMEMBASSY SINGAPORE 6536
RHEHNSC/NSC WASHDC
RUEAIIA/CIA WASHDC
UNCLAS SECTION 01 OF 03 JAKARTA 000882 
 
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: ECON EFIN ETRD EINV ID
 
SUBJECT:  INDONESIA - GROWTH SLOWS, BUT STILL FASTEST IN SOUTHEAST 
ASIA, AND ECONOMIC TEAM CHANGES WELCOMED 
 
1. (SBU) Summary:  Indonesia's economy grew by 4.4 percent 
year-over-year (y-o-y) in the first quarter of 2009, the fastest in 
Southeast Asia.  Growth came in slightly above market expectations, 
supported by strong domestic demand.  While slower than the 5.2 
percent y-o-y recorded during the previous quarter, Indonesia's 
continued resilience has prompted upward revisions in 2009 growth 
forecasts.  Market observers welcomed President Yudhoyono's 
selection of Bank Indonesia (BI) Governor Boediono as his running 
mate as positive for investor sentiment and economic policy 
continuity.  Market and political analysts also applauded 
parliament's May 12 confirmation of Darmin Nasution, Director 
General of Tax, Ministry of Finance, as new BI Senior Deputy 
Governor.  End summary. 
 
 
Consumption and Government Expenditure Drive 1Q09 Growth 
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - 
 
2. (U) In marked contrast with most other countries in the region, 
first quarter 2009 economic growth in Indonesia was positive on both 
a y-o-y basis (4.4 percent) and a quarter-over-quarter (q-o-q) basis 
(1.6 percent, not seasonally adjusted), according to Statistics 
Indonesia.  Strong household consumption (up 5.8 percent y-o-y) and 
public spending (up 19.2 percent y-o-y) drove first-quarter growth. 
Gross fixed capital investment growth moderated (rising 3.5 
percent), while exports of goods and services fell by 19.1 percent 
on continued weak global demand.  On the production basis, 
first-quarter growth was strongest in the following sectors: 
transportation and communications (up 2.1 percent q-o-q; 16.7 
percent y-o-y); agriculture (up 19.3 percent q-o-q; 4.8 percent 
y-o-y); electricity, gas and water (up 3.6 percent q-o-q; 11.4 
percent y-o-y).  Manufacturing, trade/hotels/and restaurants, 
construction and mining all registered quarterly declines, but all 
sectors experienced positive growth on a y-o-y basis. 
 
Revising 2009 Growth Forecasts on Positive Economic 
Data and Favorable Political Developments 
- - - - - - - - - - - - - - - - - - - - - 
 
3. (SBU) Indonesia's economic growth outlook for 2009 has been 
subject to frequent revision.  The International Monetary Fund (IMF) 
lowered its 2009 GDP growth forecast for Indonesia to 2.5 percent in 
April (though the IMF resident representative expects the IMF will 
raise its forecast following a mission visit in late May/early 
June.)  The current World Bank and Asian Development Bank forecasts 
are for growth of 3.4 percent and 3.6 percent, respectively. 
Several market analysts have revised upwards their growth forecasts 
in recent days on positive economic data and favorable political 
developments.  Although most revised projections remain slightly 
below the government's forecast of 4-4.5 percent growth, they are 
well above earlier forecasts of less than two percent. 
 
4. (U) Markets welcomed Indonesia's positive balance of payments 
(nearly USD 4 billion) in first quarter 2009, on improved current 
and financial account results.  According to BI, an increased 
surplus in the non-oil and gas trade balance (to USD 4.59 billion) 
and reduced deficits in the oil trade balance (to USD -155 million) 
and services (to USD -2.5 billion) account were key to a surplus in 
the current account (to USD 1.79 billion), which followed three 
consecutive quarters in deficit.  BI noted that the rate of decline 
in the non-oil and gas exports had slowed on a month-on-month basis, 
on recovery of some export commodity prices and considerable demand 
for copper and coal from some Asian economies.  Falling oil imports 
due to slowing economic growth and the ongoing conversion program to 
replace oil-based fuels with gas and coal improved the oil trade 
balance.  In 1Q09, the financial account registered a surplus of USD 
2.3 billion, a significant turnaround from a deficit of USD 4.1 
billion in 4Q09.  Higher investment in the oil and gas sector and 
acquisitions in the telecommunications sector bolstered the surplus 
in direct investment.  Issuance of foreign currency government bonds 
was key to a portfolio investment surplus of USD 1.9 billion, a 
dramatic improvement from the portfolio investment deficit of USD 
4.37 in 4Q08. 
 
5. (SBU) Market analysts welcomed President Yudhoyono's May 15 
announcement of BI Governor Boediono as his running mate in upcoming 
presidential elections as positive for investor sentiment, economic 
policy continuity and prospects for reform efforts.  Market and 
 
JAKARTA 00000882  002 OF 003 
 
 
political observers also applauded parliament's May 12 confirmation 
of Darmin Nasution, Ministry of Finance Director General of Tax, as 
BI Senior Deputy Governor to replace current Senior Deputy Governor 
Miranda Goeltom in late June.  Nasution, a Sorbonne-educated Ph.D. 
in Economics, has received high marks for professionalism, personal 
integrity and supervision of reform of Indonesia's Tax Department. 
With Boediono's resignation as BI Governor, effective May 16, 
Goeltom is currently serving as Acting Governor. 
 
Consumer Confidence Remains High, 
Business Sector More Subdued 
- - - - - - - - - - - - - - - 
 
6. (U) Indonesian consumer confidence remains high, shoring up 
domestic demand.  Indonesian consumers had the highest confidence 
level in a recent Nielsen Global Consumer Confidence Index of fifty 
countries.  Indonesia was only one of two countries whose consumers 
remained confident, despite the global slowdown, according to the 
Nielsen survey.  Consumer confidence rose according to Bank 
Indonesia's April monthly Consumer Confidence survey, which showed 
sentiment moving to optimism (an index reading above 100) for the 
first time since November 2007. 
 
7.  (U) Views from the business sector for the economic outlook 
remain more subdued, as the business community continues to express 
frustration with continued high lending interest rates and slow 
implementation of the government's fiscal stimulus package. 
Indonesia's first quarter 2009 Business Tendency Index, which 
measures most recent economic developments based on a survey of 
2,300 large and small firms, fell from the fourth quarter. 
Prospects for the second quarter of 2009 were also forecast to 
decline, although more slowly than in the first quarter.  A lack of 
foreign orders expected in the second quarter weighed most on the 
manufacturing and trade/hotel/ 
restaurant sectors. 
 
Improved Domestic Bond Issuance 
Further Eases Government Funding Pressures 
- - - - - - - - - - - - - - - - - - - - - - 
 
8. (SBU) A May 12 domestic bond auction attracted strong demand, 
further easing government funding pressures.  The auction of four 
tranches (one-year notes, and reopened 7-, 15- and 30-year bond 
series) drew bids of more than IDR 14.7 trillion.  The GOI issued 
IDR 5.375 trillion in bonds, well above the initial notional target 
of IDR 2 trillion.  Seven-year bonds were most heavily bid, with the 
average yield on bonds issued at 11.19 percent, while one-year notes 
yielded 8.39 percent, fifteen-year bonds 12.29 percent and 
thirty-year bonds 12.59 percent. 
 
Foreign Direct Investment Picture Still Mixed 
- - - - - - - - - - - - - - - - - - - - - - - 
 
9. (U) The Investment Coordinating Board of Indonesia (BKPM) 
recently lowered its investment growth forecast for 2009 to 9 
percent, after April foreign direct investment (FDI) fell by 4.1 
percent y-o-y to USD 1.4 billion.  Domestic investment more than 
doubled on a y-o-y basis to USD 142 million in April, according to 
BKPM.  Some firms continue to cancel or scale back investments in 
Indonesia.  ArcelorMittal recently announced it would not move 
forward with potential multi-billion dollar investments in the steel 
sector, including a strategic investment in state-owned PT Anak 
Krakatau opposed by local stakeholders.  Other firms are moving 
forward, however, with Volkswagen announcing an initial investment 
of USD $47 million in an assembly plant to supply the ASEAN market. 
Other large natural resource deals reportedly under negotiation 
include a USD 4.6 billion nickel project by French and Japanese 
investors, in partnership with a local firm. 
 
Labor Data Shows Improvement, But May Mask 
Higher Underemployment 
- - - - - - - - - - - - 
 
10. (SBU) Although the most recent national labor data showed an 
improvement in unemployment, the results may mask higher 
underemployment resulting from a cutback in working hours in the 
formal sector.  The business community here has told us that they 
have an agreement with the government to avoid large-scale layoffs 
 
JAKARTA 00000882  003 OF 003 
 
 
through election season to prevent instability.  According to 
Statistics Indonesia data released May 15, open unemployment 
declined in February 2009 to 8.14 percent, down from 8.46 percent in 
August 2008.  The labor pool had increased by 1.79 million to 113.74 
million during the period.  The number of persons working at least 
35 hours per week rose by 1.68 million and those working less than 
35 hours per week increased by 250,000.  The economic slowdown had 
taken a toll in the construction sector, where employment fell from 
5.44 million to 4.61 million, and in the transportation, warehousing 
and communications sector, where employment fell from 6.18 million 
to 5.95 million. Employment in the agricultural and trade sectors -- 
areas which often absorb laid-off workers -- increased, with 
agricultural employment rising from 41.33 million to 43.03 million 
and trade-related employment increasing from 21.22 million to 21.84 
million. 
 
 
HUME