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Cablegate: Indonesia - Economic and Financial Highlights August -

VZCZCXRO7897
RR RUEHCHI RUEHCN RUEHDT RUEHHM
DE RUEHJA #3074/01 3091056
ZNR UUUUU ZZH
R 051056Z NOV 07
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 6919
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHKO/AMEMBASSY TOKYO 1060
RUEHBJ/AMEMBASSY BEIJING 4447
RUEHBY/AMEMBASSY CANBERRA 1493
RUEHUL/AMEMBASSY SEOUL 4271
RUEAIIA/CIA WASHDC

UNCLAS SECTION 01 OF 04 JAKARTA 003074

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DEPT FOR EAP/MTS AND EB/IFD/OMA
TREASURY FOR IA-SETH SEARLS
SINGAPORE FOR SUSAN BAKER
COMMERCE FOR 4430-BERLINGUETTE
DEPARTMENT PASS FEDERAL RESERVE SAN FRANCISCO FOR FINEMAN
DEPARTMENT PASS EXIM BANK

E.O. 12598: N/A
TAGS: EFIN EINV ECON PGOV ID
SUBJECT: INDONESIA - ECONOMIC AND FINANCIAL HIGHLIGHTS AUGUST -
OCTOBER 2007


1. Summary. Inflation was higher for September and October due to
seasonal factors including the Islamic fasting month of Ramadhan and
Eid holiday. Bank Indonesia (BI) kept its policy rate steady in
view of volatile markets and inflationary pressure. On July 31,
Government of Indonesia (GOI) announced the biggest privatization
since 1995 of the second largest state-owned Bank Negara Indonesia
(BNI) which raised Rp 8.1 trillion ($890 million). GOI bond
auctions on September and October raised a total of Rp 16.45
trillion ($1.8 billion) in funds. GOI received Rp 799 billion ($88
million) from debt swap for its 16-year bonds yielding at 9.79%. On
September 12, the Parliament approved the GOI's plans to
recapitalize two state firms tasked with helping small-and-medium
enterprises (SMEs) in obtaining loan financing. On October 9, the
Parliament approved the GOI's 2008 state budget, with a deficit of
1.7% of GDP and economic growth of 6.8%. Moody's Investors Service
upgraded Indonesia's credit ratings and foreign currency long-term
debt and foreign currency long-term deposit ratings of 11 Indonesian
banks. Standard and Poor's Ratings Services affirmed its ratings on
Indonesia with a stable outlook. This cable uses and exchange rate
of 9,103 per dollar. End summary.

Rising Inflation from Holiday Season
------------------------------------

2. On November 1, the Central Bureau of Statistics (BPS) announced
it recorded 0.79% inflation in October, bringing the year-on-year
(YoY) inflation rate to 6.88%. It eased slightly compared to 6.95%
logged in September. Within analysts' expectations, inflation was
relatively high for these two months as demand for food products and
transportation picked up. The Eid holiday celebrations marking the
end of fasting month Ramadhan fell in mid-October this year. Core
inflation went up by 0.8% month-on-month (MoM), and 6.13% YoY in
October, compared to September's 0.7% and 6.03% respectively.

--------------------------------------------- -
Table 1: Consumer Price Inflation Components
September - October 2007
--------------------------------------------- -
Component September October
MoM YoY MoM YoY
--------------------------------------------- -
Foodstuffs 1.81 12.99 1.87 12.64
Prepared food,
Beverages, tobacco 0.45 6.82 0.51 6.67
Housing, water,
electric, fuel 0.18 5.22 0.21 5.18
Clothing 1.22 5.39 2.05 6.49
Health 0.44 3.16 0.45 5.14
Education,
recreation/sports 1.70 8.57 0.21 8.69
Transportation,
communication and
financial services 0.07 1.18 0.47 1.19
--------------------------------------------- -
Total 0.80 6.95 0.79 6.88
--------------------------------------------- -

Core Inflation (1) 0.70 6.03 0.80 6.13

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

Source: Central Bureau of Statistics (BPS)

Interest Rate Cut to 10.75%
---------------------------

3. Amid volatile markets and inflationary pressure connected with
the religious holidays, BI maintained its policy rate at 8.25% at
October 8's monetary policy meeting, the fourth month in a row of
steady rates. "It is not the right time to cut the interest rate.
It would be better to hold it at the current level," Senior Deputy
Governor Miranda Goeltom said. "We expect to keep it steady for now
while assessing the situation and will make the decision at the
right time on when interest rates should fall," she added as quoted

JAKARTA 00003074 002 OF 004


by Reuters. BI is maintaining its 2007 year-end inflation forecast
of about 6%. Analysts expect one more rate cut in the remainder of
the year to bring the key BI rate to 8%, as inflation is likely to
moderate following the fasting month of Ramadhan and the Islamic
holiday season.

BNI Bank Shares Sold - 26%
--------------------------

4. In the first major privatization for years, the State Minister
for State Enterprises announced on July 31 that the sale of a 26%
stake in second largest state-owned Bank Negara Indonesia (BNI)
raised Rp 8.1 trillion ($890 million). The share sale, via a
secondary public share offering, was the biggest privatization since
the government sold a minority stake in telecommunications giant
Telkom in 1995. "The transaction has been successfully accomplished
although the market has not been really conducive. It reflects
investor confidence in the Indonesian economy, the banking sector
and BNI's prospects in the future," the office said in a statement,
according to Reuters. The government plans to use around half the
funds to help plug the state budget deficit and the rest to
strengthen the bank's capital base. The bank, which has a strong
presence in corporate and retail banking, had total assets of about
Rp 175 trillion ($19 billion) in the first quarter of 2007.

August, September Long-Term Bond Auctions
-----------------------------------------

5. The GOI raised a total of Rp 9.5 trillion ($1 billion) from bond
auctions on August 28. It sold Rp 3.5 trillion ($385 million) of
21-year bonds at a 10.29% yield and Rp 6 trillion ($659 million)
worth of 15-month zero-coupon papers at an average yield of 8.24%.
The Ministry of Finance's Director General of Debt Management Rahmat
Waluyanto said that the auction drew a good response from the
market. He suggested that the impact of the US sub-prime credit
crisis on Indonesia's financial markets is gradually waning. On
September 29, the GOI raised another Rp 6.95 trillion ($764
million), Rp 3.45 trillion ($379 million) from auctioning 21-year
bonds at an average yield of 9.9%, and Rp 3.5 trillion ($385
million) from 11-year bonds bonds yielding 9.4%.

GOI Swaps Debt
--------------

6. The Ministry of Finance received Rp 799 billion ($88 million) in
bids from investors who wanted to swap shorter-maturity bonds for
GOI's 16-year bonds yielding at 9.79%. Investors submitted a total
of Rp 1.46 trillion ($160 million) in bids at the auction. The
government has been trying to lengthen its debt maturity profile by
offering investors the opportunity to exchange shorter-term bonds
for longer-dated paper to reduce the burden of maturing paper in the
next five years. So far this year, the department has exchanged a
total of Rp 15.2 trillion ($2 billion) of short-dated government
bonds in longer-dated paper.

Parliament Approves 2008 State Budget
-------------------------------------

7. On October 9, the Parliament approved the GOI's 2008 state
budget, which proposes a larger deficit of 1.7% of GDP compared with
1.5% this year and economic growth of 6.8% against 6.3% this year.
Total budget revenue for 2008 is set at Rp 781.4 trillion ($86
billion) or 18.1% of GDP while total expenditure is set at Rp 854.7
trillion ($94 billion), resulting in a budget deficit of Rp 73.3
trillion ($8 billion) or 1.7% of GDP. During the plenary session,
Finance Minister Sri Mulyani said that, "The government is
optimistic it can achieve the 2008 economic growth, supported by an
expected improvement in consumer spending and higher investment in
line with the improving investment climate."

8. The 2008 state budget assumes inflation at 6%, lower than the
government's forecast of 6.5% for this year, while the rupiah
exchange rate is set at 9,100 to the US dollar compared to 9,050 in
this year's budget. The three-month Bank Indonesia Certificate
(SBI) rate is projected to fall to 7.5% from 8% this year, while the
oil price assumption is $60 per barrel, unchanged from this year.
The parliament and the GOI also agreed on a dividend payment of Rp

JAKARTA 00003074 003 OF 004


26 trillion ($3 billion) by state-owned companies.

Parliament Approves SOE Recapitalization
----------------------------------------

9. The Parliament, on September 12, approved plans to recapitalize
two state firms tasked with providing loan insurance to small and
medium sized enterprises (SMEs). According to the plan, the GOI
will inject Rp 850 billion ($93 million) into Askrindo and the
remaining Rp 600 billion ($66 million) into Perum Sarana
Pengembangan Usaha to allow them to offer more loan insurance for
banks in case their SME loans turn sour. The scheme is part of
GOI's efforts to aid the financing for SMEs, which employ the
majority of the country's 100 million labor force. Sahala
Lumban-Gaol, deputy minister in the economic coordinating ministry
told Reuters, "The aim is to increase the capability of the firms in
providing guarantees on bank loans extended to SMEs." Finance
Minister Sri Mulyani Indrawati, in a parliamentary hearing on
September 11, stated that SMEs (defined as those with annual sales
of a maximum $15 million) play an important role in the economy.

Moody's Upgrades Indonesia's Credit Ratings
-------------------------------------------

10. On October 18, Moody's Investors Service upgraded Indonesia's
credit ratings, lifting the Indonesian government's foreign- and
local-currency bond ratings to Ba3 from B1 and its foreign-currency
bond ceiling to Ba2 from Ba3. It said the outlook on all ratings is
stable, citing progress in cutting its debt and ample foreign
exchange reserves and trade surplus, which offer buffers against
external shocks. The move brings Moody's rating belatedly into line
with rankings by both Standard and Poor's Ratings Services and Fitch
Ratings. Fitch, which has a positive outlook on its Indonesia
grade, is still the most upbeat on the country. "Along with
prolonged fiscal restraint and recurrent under-execution of regional
and local level spending targets, exchange-rate appreciation has
also assisted in reducing the government debt ratio from a high of
100% of gross domestic product (GDP) in 2000 to an expected 34% in
2008," Moody's lead analyst for Indonesia Aninda Mitra was quoted as
saying.

11. Moody's also raised the foreign currency long-term debt and
foreign currency long-term deposit ratings of 11 Indonesian banks --
Bank Central Asia, Bank Danamon, Bank Internasional Indonesia, Bank
Lippo, Bank Mandiri, Bank Negara Indonesia, Bank Niaga, Bank
Permata, Bank Rakyat Indonesia, Bank Tabungan Negara and Pan
Indonesia Bank.

Standard and Poor's Affirms Ratings for Indonesia
--------------------------------------------- ----

12. On September 25 Standard and Poor's Ratings Services affirmed
its ratings on Indonesia with a stable outlook, stating that the
ratings are underpinned by continued improvements in the nation's
debt and external liquidity positions. "Despite a modest rise in
the central government deficit, we expect the government to adhere
to fiscal discipline," said analyst Sani Hamid. The current account
surplus continued to grow and there were steady FDI inflows and
portfolio investments, he added. S&P has 'BB-/B' foreign currency
and 'BB+/B' local currency ratings on Indonesia.

--------------------------------------------- ------
Table 2: Selected Economic, Financial, and Trade Statistics, July -
October 2007
--------------------------------------------- ------
Jul Aug Sep Oct
--------------------------------------------- ------
CPI Inflation (YoY) 6.06 6.51 6.95 6.88

CPI Inflation (MoM) 0.72 0.75 0.80 0.79

Rp/USD Exch. rate(1) 9,186 9,410 9,137 9,103

30-day SBI rate (1) 8.25 8.25 8.25 8.25

Foreign Res. ($ bn)(1) 51.9 51.4 52.9


JAKARTA 00003074 004 OF 004


JSX Composite Index(1) 2,349 2,194 2,359 2,643

Exports ($ billion) 9.8 9.6 9.5

Percent change (YoY) 10.5 7.8 7.6

Imports ($ billion) 6.3 6.9 6.8

Percent change (YoY) 16.1 16.9 17.4

Trade Balance 3.5 2.7 2.7

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

HUME

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