VZCZCXRO1335
PP RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHJA #1344/01 2251255
ZNR UUUUU ZZH
P 131255Z AUG 09
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC PRIORITY 3065
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
INFO RUCPDOC/USDOC WASHDC 1578
RUCNASE/ASEAN MEMBER COLLECTIVE
RHEHNSC/NSC WASHDC
RUEAIIA/CIA WASHDC

UNCLAS SECTION 01 OF 03 JAKARTA 001344 
 
SENSITIVE 
SIPDIS 
 
DEPARTMENT FOR EAP/MTS, EAP/EP, E AND EEB/IFD/OMA 
TREASURY FOR T.RAND 
USTR FOR EHLERS 
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 RIDING OUT GLOBAL DOWNTURN WELL 
 
¶1. (SBU) Summary:  Indonesia is riding out the global downturn well. 
 Second quarter GDP growth of 4.0 percent year-on-year came in above 
expectations and first half 2009 growth of 4.2 percent was among the 
highest in Asia.  Improved global sentiment and higher commodity 
prices have benefited Indonesian financial markets, as have capital 
inflows attracted by political stability following peaceful 
elections and by high returns on rupiah assets.  Although Indonesia 
remains vulnerable to shifts in global sentiment, the main stock 
index has risen by more than 76 percent and the rupiah has 
appreciated against the US dollar by over nine percent year-to-date. 
 Bank Indonesia cut the policy interest rate by 25 basis points to 
6.5 percent on August 5, after consumer price inflation fell to 2.71 
percent in July, a nine-year low.  The Indonesian government and 
corporate sector continue to successfully access capital markets. 
Trade also improved in June and officials here have projected higher 
growth in the second half as global demand recovers and fiscal 
stimulus expenditures kick in.  End summary. 
 
Second Quarter Growth of 4 Percent Exceeds Expectations 
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¶2. (U) Indonesia registered stronger than expected GDP growth of 4.0 
percent year-on-year (y-o-y), down slightly from first quarter 
growth of 4.4 percent, Statistics Indonesia reported August 10.  On 
a quarterly basis, growth accelerated to 2.3 percent, up from a 
revised 1.7 percent pace in the first quarter.  First half 2009 GDP 
growth of 4.2 percent (y-o-y) remained among the strongest in the 
region.  The positive results have triggered some market analysts to 
upgrade growth forecasts for both 2009 and 2010. 
 
¶3. (U) All major sectors of the economy grew in the second quarter, 
supported by strong government consumption and moderating household 
consumption.  Government consumption increased by 17.0 percent y-o-y 
and 23.7 percent quarter-on-quarter (q-o-q).  Household consumption 
rose by 4.8 percent y-o-y and 0.2 percent q-o-q.  Gross fixed 
capital investment rose by a modest 2.7 percent y-o-y, 2.4 percent 
q-o-q.  Exports increased by 7.4 percent q-o-q, but declined 15.7 
percent y-o-y.  Sectors driving growth in the second quarter 
included transportation and communications (up 17.5 percent y-o-y) 
and electricity, gas and water (up 15.4 percent y-o-y). 
Agricultural production rose by 2.4 percent y-o-y and manufacturing 
increased 1.5 percent y-o-y.  Industrial production by large and 
medium firms also increased by 2.11 percent q-o-q, after a first 
quarter decline of 1.65 percent.  Production of textiles, food and 
beverages and motor vehicles showed the strongest improvement for 
the period.  Industrial production for the second quarter rose by 
0.38 percent y-o-y. 
 
BI Cuts Policy Rate Again, As Inflation Hits 9-Year Low 
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¶4. (U) Bank Indonesia (BI) cut its overnight policy interest rate by 
25 basis points to 6.5 percent August 5, in line with market 
expectations.  This brought total monetary easing to 300 basis 
points since BI began cutting rates in December.  In its monetary 
policy statement, the Board of Governors said inflation would 
continue falling on still limited domestic demand and declining 
inflation expectations, but noted the likelihood of rising 
inflationary pressure in 2010, fueled by growing domestic demand and 
increases in international commodity prices.  The Board said 
monetary policy would be directed to anticipate this increased 
inflationary potential and to achieve the 2010 inflation target of 
about five percent.  Many analysts expect the August cut will be 
BI's last in this easing cycle.  BI said it expects 2009 growth to 
reach the upper limit of the 3.5 to 4.0 percent range.  Foreign 
reserves slipped slightly to USD 57.4 billion as of end-July, 
equivalent to 5.5 months of imports and servicing of official 
external debt, from USD 57.58 billion at end-June). 
 
¶5. (U) Tame consumer price inflation, helped by a strengthening 
rupiah, reached a nine-year low of 2.71 percent year-on-year in 
July, down from 3.65 percent in June.  Consumer prices rose 0.45 
percent month-on-month (from 0.11 percent in June).  Prices 
increased across most product groups, including food, which climbed 
1.1 percent m-o-m.  Core inflation rose 0.31 percent m-o-m, and 4.91 
percent y-o-y, down from 5.56 percent in June. 
 
¶6. (U) BI reported that national banking conditions remained stable. 
 The capital adequacy ratio stood at 17.0 percent in June, down from 
17.3 percent in May, and gross non-performing loans fell to 4.5 
percent (from 4.7 percent in May).  Banks' interest rate response to 
 
JAKARTA 00001344  002 OF 003 
 
 
cuts in the BI rate has improved slightly, with deposit rates 
declining by an average of 188 basis points and lending rates 
falling by an average 24 basis points from December 2008 through 
June 2009.  Bank lending expansion remains very slow on slack demand 
and caution by lenders about credit quality.  Lending growth y-o-y 
slowed in June to 15 percent, from 17.7 percent in May. 
 
June Trade Surplus Narrows As Imports Rebound 
More Sharply Than Exports 
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¶7. (U) Trade improved in June, but remained in the doldrums on an 
on-year basis, according to Statistics Indonesia.  Imports rebounded 
more sharply (rising 4.1 percent m-o-m to USD 7.95 billion) than 
exports (up 1.3 percent m-o-m to US 9.33 billion), resulting in a 
smaller trade surplus of USD 1.4 billion in June, down from USD 1.6 
billion a month earlier.  June imports declined by more than 34 
percent y-o-y, while exports declined by more than 27 percent y-o-y, 
not seasonally adjusted.  Non-oil and gas imports rose by 7.1 
percent to USD 6.5 billion, while oil and gas imports fell by 7.6 
percent to USD 1.4 billion.  Oil and gas exports rose by nearly 28 
percent on higher crude oil prices and higher volumes (crude oil 
volume rose by 4.1 percent and natural gas by 12.6 percent). 
Non-oil and gas exports declined by 2.4 percent, led by a USD 473.8 
million drop in animal/vegetable fats and oils and a USD 110 million 
drop in mineral fuels. 
 
¶8. (U) Indonesia's non-oil and gas trade with China declined in 
June, with Indonesian exports slipping 0.8 percent to USD 727.7 
million and imports down by 2.8 percent to USD 1.04 billion.  Its 
trade with Japan rose significantly, with exports up 12.8 percent to 
USD 1.03 billion and imports up 17.4 percent to USD 836.5 million. 
Indonesia's trade with ASEAN also increased, with exports up 7.4 
percent to USD 1.83 billion and imports up 11.9 percent to USD 1.46 
billion.  Indonesia's non-oil and gas exports to the U.S. rose by 3 
percent to USD 876.4 million, while its imports from the U.S. fell 
by 15 percent to USD 519 million.  Trade with the EU declined, with 
non-oil and gas exports falling 12.7 percent to USD 1.03 billion and 
imports falling by 9.2 percent to USD 737.9 million. 
 
¶9. (U) Imports of consumer goods rose by 8.3 percent (to USD 547.4 
million) and imports of raw materials and intermediates increased by 
7.9 percent to USD 5.87 billion.  Imports of capital goods fell by 
9.5 percent to USD 1.53 billion, led by a sharp decline in aircraft 
imports. 
 
Market Rally 
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¶10. (U) Indonesian financial markets have rallied on extremely 
positive sentiment and increasing capital inflows -- which some, 
including BI, have termed euphoria.  The July 17 Jakarta bombings 
had only a temporary and extremely limited impact on financial 
markets.  In recent weeks, the Jakarta Composite Index has climbed 
to nearly 2,400 points, for a gain of over 76 percent through August 
13, and the rupiah strengthened to below IDR 10,000/USD.  High 
yields have drawn increasing foreign interest in BI certificates and 
government and corporate bonds.  Yields on Indonesian government 
bonds declined from nearly 13.8 percent on ten-year bonds in early 
March, to about 10 percent in late July, before ticking up again (to 
about 10.5 percent on August 13) as prospects dim for further BI 
rate cuts. 
 
¶11. (SBU) Meanwhile, the Indonesian government continues to 
successfully access capital markets.  The Finance Ministry announced 
August 10 that the government had financed over 82 percent of the 
planned 2009 budget deficit.  The government has further diversified 
its sources of financing, concluding a JBIC-backed yen-denominated 
Samurai bond in the amount of 35 billion yen on July 29 in a private 
placement.  The ten-year bonds carried a 2.73 percent coupon and 
were sold at par.  On August 10, the Finance Ministry announced that 
its sixth retail offering of rupiah bonds had drawn strong demand 
(IDR 8.5 trillion, about USD 860 million).  The issuance of these 
three-year bonds, which carry a 9.35 percent annual coupon, closed 
on August 12. Indonesia and Japan's agreement in July to establish a 
yen swap arrangement in the amount of 1.5 trillion yen (USD 15.6 
billion) as a precautionary measure has provided additional 
assurance to markets regarding Indonesia's ability to respond to a 
crisis and helped to reduce currency volatility. 
 
¶12. (U) The Indonesian corporate sector has also taken advantage of 
 
JAKARTA 00001344  003 OF 003 
 
 
improved conditions to raise financing, completing what has been 
described as the first high-yield offerings in Asia since Lehman 
Bros. collapsed.  During the first week of August, retailer PT 
Matahari Putra Prima raised USD 200 million in three-year bonds 
reportedly priced to yield 11.75 percent and state-owned power 
company PT PLN raised USD 750 million by issuing 10-year U.S. 
dollar-denominated bonds, priced to yield 8.125 percent.  At the end 
of July, state-owned oil and gas firm Pertamina signed syndicated 
loans for USD 400 million and IDR 3 trillion (about USD 300 million) 
with local and foreign banks. 
 
¶13. (SBU) Indonesia continues to make its case for credit ratings 
upgrades following Moody's change in outlook for Indonesia's Ba3 
sovereign rating to positive from stable in June.  On July 7, the 
Japan Credit Rating Agency upgraded its ratings on the foreign 
currency long-term senior debts of Indonesia to BB+ from BB and on 
its local currency long-term senior debts to BBB- from BB+, with 
stable outlooks on both. 
 
Prospects and Challenges:  Spending the Money 
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¶14. (SBU) While Indonesia remains vulnerable to sudden shifts in 
risk aversion and capital flows given its open capital account, the 
government's economic policy team and BI continue to receive strong 
marks, including from the International Monetary Fund in its recent 
Article IV statement, for their effective handling of the rough 
economic climate.  An immediate challenge for the Yudhoyono 
administration (current and incoming) will be to maintain growth in 
the second half of 2009 without the election-related spending which 
supported strong consumption in the first half of the year.  Most 
market observers believe BI has reached the end of its current 
monetary easing and that fiscal stimulus will need to support growth 
going forward.  The private sector is urging the government to speed 
up execution of the 2009 budget to spur demand.  Continued strong 
consumer confidence -- at its highest level in five years according 
to a July BI survey -- and lower lending rates are expected to 
support domestic demand in the third and fourth quarter of 2009.