Cablegate: Indonesia - Economic and Financial Highlights March 2007

DE RUEHJA #1102/01 1090854
R 190854Z APR 07





E.O. 12598: N/A

1. Summary. On April 2, the Central Bureau of Statistics (BPS)
announced that consumer price inflation rose a modest 0.24% in March
on a month-on-month (MoM) basis as rice price increases moderated.
Three days later, Bank Indonesia (BI) announced it would keep its
benchmark 30-day Bank Indonesia Certificate (SBI) rate unchanged at
9% after ten interest rate cuts totaling 375 basis points over the
past 11 months. The rupiah remained generally stable in March in
the wake of February's emerging market volatility, appreciating by
0.5% against the U.S. dollar. The Jakarta Stock Exchange (JSX)
composite index rose by 5.2% over the same period. Minister of
Finance Sri Mulyani Indrawati told a Parliament hearing on March 22
that the Government of Indonesia (GOI) is considering increasing the
2007 budget deficit to an amount equivalent to 1.5 - 2% of Gross
Domestic Product (GDP), up from 2006's 1.1% of GDP target. On March
20, the Ministry of Finance (MOF) raised Rp 9.2 trillion ($1
billion) from an auction of 10-and 15-year government bonds in which
18 newly-appointed primary dealers participated for the first time.
On March 26, the MOF offered Rp 6.2 trillion ($680 million) of its
popular three-year retail bonds to the public. Effective March 22,
the Indonesian Deposit Insurance Corporation (LPS) reduced its
insurance coverage to Rp 100 million ($10,970) per depositor per
bank, the final step in the GOI's rollback of its blanket bank
guarantee. Several major Indonesian banks issued their 2006
financial statements in March 2006, most of which showed increased
profitability and improved asset quality. Former Australian Primer
Minister and Treasurer Paul Keating called on the GOI to give up its
ownership in banks at the March 25-28 eighth annual Asian Banker
Summit in Jakarta. However, on March 26, state-owned Bank Negara
Indonesia's (BNI) President Director Sigit Pramono confirmed the
postponement of plans to sell a stake in the bank while the GOI
awaits Parliamentary approval. This cable uses an exchange rate of
9,118/USD. End summary.

Stable Markets in March

2. On April 2, the Central Bureau of Statistics (BPS) announced
that consumer prices in March rose a modest 0.24% on a
month-on-month (MoM) basis as rising rice prices continued to abate.
On a yearly basis, however, inflation in March 2007 stood at 6.62%,
higher than the 6.3% recorded in February. The BPS announced that
core inflation for the month was 0.17% MoM, and 5.87% year-on-year
(YoY). BPS director Rusman Heriawan noted that the price of the
country's main staple, rice, was now causing less concern. "Rice
prices are now giving rise to weaker inflationary pressures. We are
seeing prices stabilize, and even fall slightly," he said.

Table 1: Consumer Price Inflation
Components - March 2007
Component March
Foodstuffs 0.24 11.97
Prepared food,
beverages, tobacco 0.36 6.05
Housing, water,
electric, fuel 0.29 5.04
Clothing 0.41 5.90
Health 0.20 5.38
recreation/sports 0.03 8.48
communication and
financial services 0.09 1.00
Total 0.24 6.52
Core Inflation (1) 0.17 5.87

(1) Core inflation is a measure of inflation which excludes certain
items that face volatile price movements i.e. energy, food

Source: Central Bureau of Statistics (BPS)

JAKARTA 00001102 002 OF 004

3. Despite signs of moderating food prices, BI kept its benchmark
interest rate unchanged at 9% at its April 5 monetary policy board
meeting, after a 25 bps cut on March 6. In a statement released
after the meeting, BI Governor Burhanuddin Abdullah noted that at
this time, "monitoring of prices in the administered prices, staple
goods and volatile foods categories and other macroeconomic
indicators point to the need for a closer watch on the possibility
of a future rise in inflation. Public expectations of inflation are
also predicted to follow an escalating trend in line with the
improving outlook for domestic demand in response to increased
economic activity." BI expects this year's inflation to be between
5-7%, with the key BI rate falling to 8.5% by the end of the year.
The favorable inflation figures boosted local capital markets, with
the JSX Composite Index rising 1% to 1,849 on April 2. Following
emerging market volatility in February, the rupiah remained
generally stable in March, strengthening by 0.5%. The rupiah was
bolstered by improved performance in the balance of payments, and
the continued attractiveness of yields on rupiah debt instruments.
The JSX composite index improved by 5.2% in March over February.

GOI to Run Larger 2007 Budget Deficit

4. During a March 22 discussion, Chairman of the Parliament's budget
commission Emir Moeis and Finance Minister Mulyani said that the GOI
may widen the 2007 state-budget deficit to an amount equivalent to
1.5 - 2% of GDP, or Rp 55.2 - 73.6 trillion ($6.1 - 8.1 billion).
The 2007 budget passed by Parliament projected a deficit of Rp 40.5
trillion ($4.4 billion) or 1.1% of GDP. On April 11, Mulyani
reportedly stated the GOI would use the additional funds to rebuild
after the earthquakes in West Sumatra and Yogyakarta, repair damage
from flooding in Jakarta and the Sidoarjo mudflow in East Java, and
boost domestic rice output by 2 million tons. She reportedly added
that the GOI might need additional funds to increase support to
state electricity company PLN. However, Mulyani noted that the GOI
would not announce an official figure until after discussions with
the Parliament. Deficit financing will likely come from domestic
and global U.S. dollar bonds. According to MOF Director General for
Debt Management Rahmat Waluyanto, the GOI can safely finance the
additional deficit assuming it raises Rp 3 trillion, or $330
million, per month from bond auctions. To date this year, the MOF
has raised Rp 32.8 trillion ($3.6 billion) from rupiah-denominate
bond auctions and swaps.

Government Bond Market Update

5. On March 20, the MOF raised a total of Rp 9.2 trillion ($1
billion) from several bond auctions, including Rp 4.1 trillion ($450
million) from the sale of 10-year bonds and Rp 5.1 trillion ($560
million) from selling 15-year bonds. The 10 and 15-year bonds offer
9.9% and 10.4% yields, respectively. For the first time,
Indonesia's newly appointed primary dealers participated in the
auction. On December 29, 2006 Finance Minister Sri Mulyani
Indrawati sg"ned Ministerial Decree No. 144/2006 establishing
Primary Dealer System for rupiah-denominated goe rnment securities.

Table 2: Indonesia's Primary Dealers:
-- Citibank N.A.
-- Bank Lippo
-- Deutsche Bank AG
-- Bank Mandiri
-- Bank Negara Indonesia
-- Bank Central Asia
-- Bank Panin
-- Bank Danamon Indonesia
-- Bank Rakyat Indonesia
-- Bank DBS Indonesia
-- Bank Permata
-- Bank Internasional
-- Standard Chartered Bank Indonesia
-- Bahana Securities
-- Mandiri Sekuritas
-- Danareksa Sekuritas

JAKARTA 00001102 003 OF 004

-- Trimegah Securities

6. On March 26, the MOF offered for the second time Rp 6.2 trillion
($680 million) of its popular retail bonds to the public. The
3-year retail bonds carry a 9.3% annual coupon rate. The government
sold its first Rp 3.3 trillion ($362 million) of retail bonds in
August 2006, in an action many analysts termed a big success.
Director General for Debt Management Rachmat Waluyanto told the
media "there was strong demand for a second retail bond due to
expectations of a downtrend in interest rates until the end of the

Final Roll-Back of Blanket Guarantee

7. Effective March 22, the Indonesian Deposit Insurance Corporation
(LPS) reduced its deposit insurance coverage to Rp 100 million
($10,970) per depositor per bank, the final step in the GOI's
reduction of its blanket bank guarantee. The move appeared to cause
no disruption to the banking sector, although some large depositors
divided accounts inside a single bank, moved them to larger banks,
or distributed money among different banks.

Indonesia Hosts Asian Bankers Summit

8. Banking leaders from Asia, Europe, U.S. and Australia
participated the eighth annual Asian Banker Summit on March 25-28 in
Jakarta. Over 500 banking professionals from more than 24 countries
exchanged ideas on regional and global issues at the three-day
summit, according the Indonesian Bank Association Chairman Sigit
Pramono. In his keynote speech at the summit, BI Governor
Burhanuddin Abdullah said Indonesia's banking sector has come a long
way since the crisis, when the government was forced to inject huge
amounts of public funds into the industry to prevent its collapse.
Many bankers attending the event acknowledged that Indonesia's
banking sector has recovered from the crisis. Summit director Fiona
Shaw said the Indonesian banking sector had made tremendous progress
since 1997 through a series of mergers, acquisitions, consolidations
and fairly successful micro-financing schemes. "We decided to pick
Jakarta (for the summit venue) because we thought it was time to
showcase the progress to the rest of the world," Shaw said.

9. Former Australian Primer Minister and Treasurer Paul Keating,
however, said that Indonesia needs to give up government ownership
of banks and improve its risk management capabilities. "Governments
should steer the boat, not row the boat," focusing on regulation
rather than ownership, he noted. Government ownership of banks
creates unhealthy risk within the industry and could jeopardize the
state budget, Keating reportedly said, because bank management
assumes the government will step in if they find themselves in
trouble. Private capital is generally more careful about loan
quality, Keating reportedly added.

BNI Divestment Delayed

10. On February 25, a member of Parliament's Working Committee on
Privatization announced the committee would delay a decision on
whether to divest a portion of state-owned Bank Negara Indonesia
(BNI), Indonesia's third largest lender. The GOI reportedly wanted
to sell 20% of BNI's shares in the first-phase of the planned
divestment, while a number of members of the Working Committee
demanded that the divestment be limited to 15% of the bank's shares.
"The decision of the Committee is based on 2007 State Budget," Anna
Mu'awanah, a member of the Working Committee from the National
Awakening Party Faction, told reporters. However, Sugiharto
reportedly said that the resolutions of the Working Committee "could
still be altered." Finance Minister Sri Mulyani Indrawati said she
hoped that the BNI share offering could contribute substantially to
privatization proceeds in 2007. On March 26, BNI President Director
Sigit Pramono confirmed the postponement, which comes as the GOI is
awaiting Parliamentary approval for its plans to sell stakes in 15
state-owned enterprises to meet an expanded 2007 privatization
target of Rp 4.3 trillion ($471.6 million), up from Rp 3.3 trillion
($361.9 million) in the current budget.

--------------------------------------------- ------

JAKARTA 00001102 004 OF 004

Table 4: Selected Economic, Financial, and Trade Statistics,
December 2006 - March 2007
--------------------------------------------- ------
Dec Jan Feb Mar
--------------------------------------------- ------
CPI Inflation (YoY) 6.60 6.26 6.30 6.52

CPI Inflation (MoM) 1.21 1.04 0.62 0.24

Rp/USD Exch. rate(1) 9,020 9,090 9,160 9,118

30-day SBI rate (1) 9.75 9.50 9.25 9.00

Foreign Res. ($ bn)(1) 42.6 43.3 45.7 47.2

JSX Composite Index(1) 1,805 1,757 1,741 1,831

Exports ($ billion) 9.5 8.4 8.3

Percent change (YoY) 16.9 10.5 11.5

Imports ($ billion) 4.9 5.2 4.7

Percent change (YoY) 5.9 19.5 11.1

Trade Balance 4.6 3.2 3.6

Source: Bank Indonesia, BPS, JSX
(1) End of period


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