VZCZCXRO1067
PP RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHJA #1026/01 1680959
ZNR UUUUU ZZH
P 170959Z JUN 09
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC PRIORITY 2578
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
INFO RUCPDOC/USDOC WASHDC 1576
RUCNASE/ASEAN MEMBER COLLECTIVE
RUEHGP/AMEMBASSY SINGAPORE 6544
RUEHKO/AMEMBASSY TOKYO 3059
RHEHNSC/NSC WASHDC
RUEAIIA/CIA WASHDC

UNCLAS SECTION 01 OF 02 JAKARTA 001026 
 
SENSITIVE 
SIPDIS 
 
DEPARTMENT FOR EAP/MTS, EAP/EP, AND EEB/IFD/OMA 
SINGAPORE FOR S. BAKER 
TREASURY FOR M.NUGENT AND T.RAND 
USTR FOR EHLERS 
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 AUTHORITIES CONFIDENT, BUT NOT COMPLACENT, 
ABOUT CURRENT ECONOMIC CONDITIONS 
 
¶1. (SBU) Summary:  Indonesian economic policymakers appear 
confident, relishing the wave of positive attention the country has 
received in recent weeks.  The recent upward revision by the IMF of 
its 2009 growth forecast for Indonesia and an improvement in the 
outlook for its sovereign rating by Moody's are the latest 
recognition of the economy's current resilience (septel). 
Authorities are not complacent, however, about challenges still 
posed by the "global financial tsunami."  While Finance Minister Sri 
Mulyani Indrawati said at a June 13 conference that she expected the 
Indonesian economy to grow by at least four percent in 2009 and by 
up to six percent in 2010, she also called for continued 
international cooperation to support recovery of the still fragile 
global economy.  End summary. 
 
FINANCE MINISTER: "NO COMPLACENCY AT ALL" 
 
¶2. (U) Finance Minister Sri Mulyani Indrawati told an international 
audience of central bankers, regulators and private-sector financial 
actors that she welcomed recent improving global economic 
conditions, but had "no complacency at all" that the global economic 
downturn was drawing to an end.  Regarding Indonesia's relative 
economic resilience, Indrawati said Indonesia's assertive domestic 
policy response and active economic diplomacy had restored 
confidence and credibility -- "the most valuable asset" -- following 
the disruption of financial markets last fall.  Indrawati delivered 
her remarks on June 13 at Bank Indonesia's (BI) annual international 
seminar focused on "Global Financial Tsunami:  What Can We Do?" 
 
¶3. (U) The minister echoed calls she has made previously for a 
coordinated response to the crisis:  the need for collective 
counter-cyclical measures; the need for the right balance between 
market regulation and dynamism and innovation (and recognition of 
the likelihood of an overreaction in regulatory approach, which may 
delay eventual recovery); and the need for multilateral development 
banks (MDBs) and international financial institutions  (IFIs) to 
provide additional resources to developing and emerging economies 
hit by the crisis.  She also highlighted her continued focus on 
improving governance and accelerating budget expenditure - 
particularly for priority infrastructure investments key to 
increasing longer-term growth. 
 
KUDOS TO JAPAN, BRICKBATS FOR CREDIT RATING AGENCIES 
 
¶4. (SBU) Indrawati praised "the outstanding efforts" of the 
government of Japan in both the G20 and in ASEAN + 3 to assist 
countries in the region in responding to the crisis.  She then 
delivered a scathing critique of credit rating agencies and their 
failures and the need for closer monitoring and increased 
transparency.  After excoriating the agencies for having not raised 
Indonesia's sub-investment grade sovereign rating, Indrawati 
challenged them to come to Jakarta to her office to learn how 
Indonesia had changed in the past decade. 
 
¶5. (SBU) The minister's most interesting observations came during 
occasional detours from her prepared remarks and in the question and 
answer period which followed.  These remarks were a mix of 
philosophical musings, vents of frustration likely triggered by the 
current presidential political campaign which has featured ceaseless 
attacks on the administration's economic record, and cautions about 
potential economic challenges down the road.  Indrawati riffed on 
the gulf between a global economic crisis and sovereign-based 
economic policymaking and on the trade-off between good governance 
and development goals when "everyone wants to provide a check and 
there is no balance".  She cited the need to manage a democratic 
government's inefficient decision-making process, while trying to 
accelerate implementation of the government's fiscal stimulus, and 
noted the Indonesian public's current obsession against government 
debt financing and the yearning by some for "benevolent 
authoritarianism".  She also cautioned about the risks to recovery 
of a possible surge in commodity prices. 
 
BI: LOOKING AT STICKY LENDING RATES, FUTURE FINANCIAL SUPERVISORY 
STRUCTURE 
 
¶6. (U) BI officials, including Acting Governor Miranda Goeltom and 
Director of Banking Regulation and Research Halim Alamsyah, focused 
 
JAKARTA 00001026  002 OF 002 
 
 
on the importance of long-term financial stability, the health of 
the banking sector and the future structure of Indonesian financial 
supervisory functions.  Goeltom said changes in financial system 
behavior had increased the complexity of monetary policy in 
Indonesia, bolstering the need for policy flexibility.  She 
highlighted the intensification of the role played by risk 
perception both in the dynamics of Indonesia's financial account and 
in the very slow response of the banking sector to transmit 
reductions in the BI policy interest rate to lower bank lending 
rates.  While BI had lowered the policy rate 225 basis points from 
December 2008 to May 2009, bank lending rates had fallen only 65 
basis points and deposit rates by 108 basis points. 
 
¶7. (U) Alamsyah described the Indonesian banking sector as stable, 
liquid, well capitalized (with a capital asset ratio of 17.6 percent 
as of April 2009) and very profitable, but not very efficient. 
Credit risk was, in his view, manageable and banks are well 
provisioned against slightly rising non-performing loans.  Alamsyah 
said supervisory function challenges included continued information 
gaps among financial supervisors, regulatory arbitrage among 
markets, the need to strengthen prudential enforcement, the need to 
provide greater financial inclusion and the need for a clearer 
mandate for Indonesia's Crisis Management Protocol, which remains 
based on a Memorandum of Understanding. 
 
¶8. (U) The seminar also included a brief discussion of plans to 
split BI's monetary policy and financial supervision by establishing 
a Financial Services Authority (OJK) by no later than 2010, as 
provided by the Banking Act of 1999, as amended, to regulate 
financial institutions.  Given Indonesia's current banking 
structure, in which banks are only lightly conglomerated, some 
participants favored BI retaining intensive supervision of core 
banks, while arguing non-core financial institutions should receive 
less intrusive supervision but be subject to strong disclosure 
requirements. 
 
PRIVATE SECTOR: A (MOSTLY) UPBEAT OUTLOOK ON INDONESIA 
 
¶9. (U) Compared to the sober assessments of the global outlook by 
IFI and MDB officials and the truly gloomy views on global 
conditions and crisis response from various academic participants, 
private-sector bankers and investors participating in the BI seminar 
held generally positive assessments of prospects for the Indonesian 
economy.  Simon Morris, CEO, Standard Chartered Indonesia, was 
upbeat, projecting GDP growth of four percent for Indonesia in 2009. 
 Morris argued that while the West had experienced systemic failure 
and collapse, Asia was facing a cyclical challenge.  Asian banks 
were better prepared to withstand recent financial market turmoil as 
a result of reforms made following the Asian financial crisis, had 
been less leveraged than their Western counterparts and were less 
exposed to toxic assets. 
 
¶10. (U) Gita Wirjawan, founder of private-equity firm PT Ancora 
International and a former investment banker, said he shared a 
pretty positive view of the Indonesian economy given sound fiscal 
policy and good budget management.  He expects BI to reduce the 
policy interest rate to six percent by end-2009, a forecast 
considerably lower than most market analysts.  Wirjawan said 
stabilization of some commodity prices had driven the recent equity 
market rally, but warned against overconfidence about the amount of 
capital that will be available to Indonesia going forward, given 
current and future U.S. financing needs. 
 
NORTH