Cablegate: Indonesia - Economic and Financial Highlights November -

DE RUEHJA #0038/01 0080850
R 080850Z JAN 08 --- ZDK PER RUEHZC1729





E.O. 12598: N/A

1. Summary. Indonesia's December inflation came in lower on a
year-on-year (YoY) basis as consumer demand eased after the Muslim
festive season. Bank Indonesia (BI) cut its interest rate by 25 bps
to 8% at its December board meeting after keeping it steady for four
months ending in November. Indonesia's GDP expanded a stronger than
expected 6.5% YoY during the third quarter of 2007 on robust
domestic demand and a higher investment rate. The Government of
Indonesia (GOI) and market observers assume an overall positive
growth picture in 2008, despite high global crude oil prices, and
economic sluggishness following the U.S. subprime mortgage crisis.
The GOI raised a total of Rp 6.6 trillion ($700 million) from its
fourth quarter bond auctions (October-December), concluding its 2007
budget target. The GOI bought back Rp 1.2 trillion ($129 million)
worth of bonds maturing 2008-2012 on a December 13 auction. BI and
the Ministry of Finance (MOF) on December 27, 2007 signed a MOU
launching an electronic banking system to support government budget
management. Banks reported strong earnings for 3Q 2007. On
December 27, 2007 Malaysia's investment arm Khazanah announced the
merger of its two Indonesian banks, Lippo and Niaga to comply with
BI's single presence policy. Newly merged Indonesia Stock Exchange
(combined from the Jakarta and Surabaya Stock Exchanges) commenced
trading on December 13. Indonesia's sole state-owned toll road
operator raised $380 million from an IPO. The Agency for the
Rehabilitation and Reconstruction of Aceh and Nias (BRR) handed over
the 100,000th house constructed after the December 2004 tsunami
disaster. This cable uses and exchange rate of 9,419 per dollar.
End summary.

Rising Inflation from Holiday Season

2. The Central Bureau of Statistics (BPS) recorded 1.1% inflation
in December, bringing the year-on-year (YoY) inflation rate to 6.6%.
The December YoY inflation rate was slightly lower than the 6.7%
recorded in November. The slowdown in price increases was attributed
mainly to lower prices for foodstuffs. It was the third consecutive
month that headline inflation slowed from the 2007 peak reached in
September. Core inflation went up by 0.68% month-on-month (MoM),
and 6.29% YoY in December, compared to November's 0.43% and 6.25%

--------------------------------------------- -
Table 1: Consumer Price Inflation Components
November - December 2007
--------------------------------------------- -
Component November December
--------------------------------------------- -
Foodstuffs 0.04 11.96 2.47 11.26
Prepared food,
Beverages, tobacco 0.43 6.63 0.91 6.41
Housing, water,
electric, fuel 0.12 4.99 0.63 4.88
Clothing 1.66 7.50 0.99 8.42
Health 0.26 4.98 0.41 4.31
recreation/sports 0.11 8.77 0.12 8.83
communication and
financial services -0.27 1.13 0.22 1.25
--------------------------------------------- -
Total 0.18 6.71 1.10 6.59
--------------------------------------------- -

Core Inflation (1) 0.43 6.25 0.68 6.29

(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)

Interest Rate Cut to 8.0%

3. Bank Indonesia (BI) trimmed its benchmark interest rate by 25

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basis points to 8.0% at its December 6, 2007 Board meeting,
delivering its 14th cut since 2006 following lower-than-expected
inflation on November. BI had kept its benchmark interest rate
steady the previous four months at 8.25% due to concerns about the
impact of unprecedented global crude oil prices.

Indonesia Recorded Q3 Growth at 6.5%

4. On November 15, 2007 the Central Statistics Bureau (BPS) reported
that the economy grew a faster-than-expected 6.5% YoY in 3Q 2007, on
track for its fastest growth in more than a decade in 2007, mainly
due to strong commodity exports and low interest rates. Compared to
the second quarter, the economy expanded by 3.9% to Rp 2,901.3
trillion ($308 billion), with a pick-up in fixed investment during
the three months to September. Exports and investment rose by 7.8%
and 8.8% YoY respectively in the third quarter, topping overall
growth, but consumer spending also showed a healthy 5.3% rise,
largely driven by a sharp fall in borrowing costs. Transport and
telecommunications led among industrial sectors with growth of
almost 12.5% YoY in the third quarter. "The agriculture sector
contributed the largest portion to economic growth in the third
quarter," said Rusman Heriawan, chairman of BPS. Heriawan said the
sector grew 10.2% from the previous quarter and 8.9% YoY.

5. In November 2007, the MOF stated that the GOI hoped to accelerate
budget spending in the fourth quarter 2007 to meet its budget target
of a 1.5% surplus over GDP - pushing funds into the economy in the
final quarter to further boost economic activity. The GOI posted a
budget surplus of Rp 17.6 trillion ($1.9 billion) in the first 10
months of 2007. As of October, the government had spent Rp 506.6
trillion ($53.8 billion) against targeted full-year spending of Rp
752.4 trillion ($79.9 billion), while revenue stood at Rp 524.3
trillion ($55.7 billion) compared to a full-year target of Rp 694.1
trillion ($73.7 billion). The MOF estimated full-year growth at
around 6.2-6.3%, the country's fastest economic growth rate in 11
years. The economy expanded 5.5% in 2006. The MOF also forecast
the rupiah would average 9,170 per dollar in the fourth quarter and
9,125 per dollar for the full year. The Investment Coordinating
Board (BKPM) announced on December 19, 2007 that direct investment
hit a 40-year record high of Rp 125.94 trillion ($13.4 billion) in
the first nine months of 2007, represented a 169.02% rise compared
to 2006.

Positive Forecasts for 2008

6. The World Bank remained strongly upbeat in its projection for
Indonesia's 2008 growth, in line with other East Asian economies.
It expects Indonesia's economy to grow steadily at least through to
the end of 2008 at 6.4%, following the estimated 6.3% in 2007. The
economy could grow by as much as 8% if the government managed to
attract more foreign investment to improve infrastructure, World
Bank economist William Wallace told reporters. The bank's East Asia
and Pacific lead economist Milan Brahmbhatt said that Indonesia
would be able to weather short-term global volatility arising out of
the US sub-prime mortgage crisis and the renewed surge in oil prices
through increased domestic consumption and investment, which would
continue to sustain growth.

7. In a November 21, 2007 interview with Dow Jones, Coordinating
Minister for the Economy Boediono stated that the growth target
range of 6.5% and 7% in 2008 is still achievable despite signs of a
global slowdown, adding that growth would be driven by exports and
domestic expansion. He underlined the need for more spending on
infrastructure in order to maintain competitiveness. In an
interview with Bloomberg, he said that "From the supply side, it is
key to keeping inflation under control. I think the main issue here
is how to beef up our capacity to prepare good projects."

8. Finance Minister Sri Mulyani is optimistic that Indonesia could
outperform its own projection for growth in 2008. "We are aiming for
higher than 6.8%," she said in an interview with Bloomberg, "India
and China will be quite strong in actually pulling growth in the
"But we must stay alert about a possible rise in inflation and a
decline in people's purchasing power in 2008," she added. Slower

JAKARTA 00000038 003 OF 006

global economic activity will also impact the economy, she said.

9. Bank Indonesia is also positive about 2008 growth. BI predicted
that the balance of payments surplus would rise 15% to $15.6
billion, led by foreign direct investment. According to Agence
France-Presse, BI stated that the balance of payments surplus in
2007 is estimated at $13.6 billion, with the surplus reaching $1.1
billion in the third quarter. BI estimates that the current account
surplus will reach $9.3 billion in 2008, down from the $10.9 billion
it estimated for 2007, due to slower growth in non-oil-and-gas
exports as global demand slows, rather than faster import growth.
The capital account surplus is seen rising to $6.3 billion from $5.6
billion in 2007. BI expects the investment climate to improve
further so that it will also boost capital inflows, especially
foreign direct investment. In line with the bigger balance of
payments surplus, BI is expecting foreign exchange reserves to rise
to $72.9 billion at the end of 2008 from the $57.3 billion estimated
for the end of 2007.

10. The International Monetary Fund (IMF), on the other hand,
forecasts a slower growth rate in 2008, at 6.1%, compared to 6.2%
estimated in 2007. According to its regional economic projection
for the Asia Pacific region, Indonesia will be affected by tightened
policies in several of the region's countries and by the slowing
down of global demand in 2008. However, the IMF expects Indonesia
to achieve positive growth in terms of investment due to an
improving investment climate.

October to December Long-Term Bond Auctions

11. The GOI raised Rp 1 trillion ($0.1 billion) from bond auctions
on October 30, 2007. It sold Rp 900 billion ($95.6 million) of
21-year bonds at a 10.15% yield and Rp 100 billion ($10.6 million)
worth of 15-year paper at an average yield of 9.45%. On November
20, the GOI raised another Rp 1.5 trillion ($159.3 million) from
auctioning five-year zero coupon debt priced to yield 9.869%,
slightly below target of Rp 2 trillion ($212.3 million). Remarks
from BI Deputy Governor Hartadi Sarwono the previous week that there
was still room to cut interest rates later in 2007 failed to
significantly boost demand for the bonds in the auction. The bonds
rank among the highest-yielding government debt in Asia.

12. At its last 2007 bond auction on December 4, the GOI raised Rp
4.1 trillion ($435.3 million) from issuing eight-year bonds priced
to yield 9.63%, double its target of Rp 2 trillion ($212.3 million),
due to strong demand from investors. Ministry of Finance Debt
Director Bhimantara Widyajala noted, "We have raised sufficient
funds through bonds in 2007 to meet the budget." The 2007 budget
targets Rp 58.5 trillion ($6.2 billion) in bond issues.

GOI Debt Buyback

13. The Ministry of Finance bought back Rp 1.203 trillion ($127.7
million) worth of government bonds maturing between 2008 and 2012
via an auction on December 13, 2007. The Ministry of Finance
regularly cuts government-borrowing costs and stabilizes debt costs
by buying back debt when bond prices fall. "The market response was
good. Buybacks can improve investor confidence by maintain liquidity
in the market while stabilizing bond prices," noted Rahmat
Waluyanto, the Ministry's Director General of Debt Management.

Central Bank Launches E-Banking
to Support State Budget Management

14. On December 27, BI's Senior Deputy Governor Miranda Goeltom and
Minister of Finance Sri Mulyani, witnessed the signing of Memorandum
of Understanding (MOU) and the initial launch of BI Government
Electronic Banking (BIG-eB). The MOU was signed by BI's Deputy
Governor Budi Rochadi and MOF's DG of Treasury Herry Purnomo. "The
operation of BIG-eB system is an implementation of Law No. 1 of 2004
regarding State Treasury, also an enhancement of fiscal and monetary
authority coordination, through the service provided by Bank
Indonesia to support government needs in improving the monitoring
and management of its Budget", stated Goeltom in her speech.

JAKARTA 00000038 004 OF 006

15. The Treasury Law describes the Government Account as managed by
the Minister of Finance, and maintained in Bank Indonesia. The MOF
will be able to obtain online and real time financial information of
the Government Account in BI, and to accelerate reporting as well as
transaction settlement process. In the first phase, BIG-eB will
make available the information module of all Government accounts
(only in rupiah currency) maintained in the Head Office and in local
offices of Bank Indonesia. Phase II will implement a rupiah
transaction module that can be settled through overbooking, such as
Treasury Single Account (TSA). Phase III is a foreign exchange
information and transaction module implementation of all Government
Accounts maintained in the Head Office or at the local offices of
Bank Indonesia. Phase IV will integrate the BIG-eB system with the
other systems related to the budget management in the MOF.

Banks Report Strong Third Quarter Results

16. Companies across the range of sectors, including banking, turned
in strong 3Q 2007 results by the end of the reporting period on
October 31. Bank Mandiri led advances in the banking sector,
posting an almost threefold gain in third-quarter profit as loan
demand increased and as it set aside less money for bad debts. Bank
Rakyat Indonesia (BRI) reported a 17% increase in profit for the
first nine months of 2007, while Bank Danamon improved its profit
performance by 22% over the same period.

Khazanah Plans to Merge Its Two Indonesian Banks
--------------------------------------------- ---

17. On December 27, 2007 Malaysian state investment arm Khazanah
Nasional Bhd, announced its plan to merge Bank Lippo and Bank Niaga,
in line with BI's "single presence" policy. This move would create
a bank with combined assets of around Rp 85.6 trillion ($9.1
billion), making it Indonesia's sixth-biggest lender. According to
a statement issued by Lippo, the merger is still subject to
regulatory approvals. Khazanah currently owns a 93% stake in Lippo
through Santubong Investment BV and Greatville Pte Ltd and 64% share
in Niaga through Bumiputra-Commerce Holdings Bhd.

Stock Exchanges Merge to Form
Indonesia Stock Exchange (BEI)

18. The Indonesia Stock Exchange (BEI), a merger of the Jakarta
Stock Exchange (JSX) and the Surabaya Stock Exchange (SSX),
commenced its first day of trading on December 3, 2007. The merged
exchanges, legally effective on November 30, jointly host trading in
approximately Rp 2,400 trillion ($256.8 billion) worth of stocks and
bonds issued by 379 companies. Before the merger, 353 companies
were listed on the BEJ and 26 on the BES. Capital Markets
Supervisory Agency (BAPEPAM) Chairman Fuad Rahmany believes that the
merger of the JSX and SSX will set the stage for development of
deeper derivatives markets. Previously the SSX, which specialized
in bond trading, wanted to explore derivatives (futures, options,
real-estate investment trusts) but the underlying asset was often
traded on the larger, more liquid JSX. As soon as the merged entity
is stable, one bond market official predicted that the MOF and
BAPPEPAM would roll out bond futures early 2008. The SSX was
already in the advanced stages of developing a financial futures
contract for government bonds.

State-Owned Toll Road Operator IPO Raises $380M
--------------------------------------------- --

19. On October 26, 2007, the GOI raised Rp 3.47 trillion ($368.4
million) from the sale of 30% of PT Jasa Marga, the country's
leading toll road operator. The Jasa Marga offer, with a price
range of Rp 1,400 and Rp 1,800, was more than four times
over-subscribed, fixing the price at the top of the range at Rp
1,700. About 40% of the institutional tranche went to international
investors, while the remaining 60% was allocated to domestic
investors. The final price values the toll road operator at about
22.5 times its projected 2008 earnings. Analysts believe that
Indonesia is picking up demand from investors who want to put their
money into something other than China and the huge amount of money

JAKARTA 00000038 005 OF 006

currently pouring in from the US. The deal is the second sale of
stock in a state-owned company in 2007, after the government's
secondary offering in PT Bank Negara Indonesia (BNI) at the end of
July, which cut the government's stake in BNI from 99.1% to about
73% and raised $774 million.

Aceh Reconstruction Agency (BRR)
Completes 100,000th Tsunami House

20. On December 14, 2007, close to the third anniversary of the Aceh
tsunami disaster, the Agency for the Rehabilitation and

Reconstruction of Aceh and Nias (BRR) symbolically handed over 138
houses which included the 100,000th new house built for tsunami
survivors. The formal ceremony took place in Teunom village, Aceh
Jaya district, one of the areas worst hit by the tsunami. "We
wanted to give a morale boost to the people here in rebuilding their
district," spokesman of the agency Mirza Keumala said, adding that
people still faced daily challenges as infrastructure remained poor.
Keumala said that reconstruction of a targeted 120,000 houses was
expected to be completed by April 2008, and despite the formal
ceremony on Friday, 103,000 have now been finished.

21. Critics point out, however, that the housing program was behind
schedule and that approximately 20% of all homes constructed remain
vacant for various reasons, including shoddy construction and a lack
of water, sewage, or electricity. In one particularly remote area,
the island of Simeulue, the regent recently complained publicly that
BRR has only managed to construct 21 houses in the district despite
having promised hundreds. BRR has vowed to do better.

22. Earlier, BRR head Kuntoro Mangkusubroto, launching a report on
progress on tsunami recovery programs, said progress had been "very
encouraging and better than planned three years ago" with more than
102,000 homes built and another 20,000 due to be completed by June
2008. Mangkusubroto, a former mining minister, said that the agency
was now focused on handing over assets and recovery efforts to the
locals, but conceded that problems were emerging. Decent housing
remains a massive concern for the local population. The agency,
whose mandate ends in April 2009, plans to get 3,000 families still
in temporary wooden barracks surrounding the provincial capital
Banda Aceh into new homes by 2008. "There will be no more housing
projects or housing construction beyond April 2008, except one or
two organizations," he warned in November. "We understand there are
still problems. We are going to solve these problems." Apart from
houses, BRR has also coordinated and completed the reconstruction of
about 2,000 km of roads, 800 schools, 600 hospitals and health
centers, 17 seaports and 10 airstrips across the province by Nov

--------------------------------------------- ----
Table 2: Selected Economic, Financial, and Trade Statistics,
September - December 2007
--------------------------------------------- ------
Sep Oct Nov Dec
--------------------------------------------- ------
CPI Inflation (YoY) 6.95 6.88 6.71 6.59

CPI Inflation (MoM) 0.80 0.79 0.18 1.10

Rp/USD Exch. rate(1) 9,137 9,103 9,376 9,419

30-day SBI rate (1) 8.25 8.25 8.25 8.00

Foreign Res. ($ bn)(1) 52.9 54.1 54.9

JSX Composite Index(1) 2,359 2,643 2,688 2,746

Exports ($ billion) 9.5 10.3 9.8

Percent change (YoY) 7.6 17.6 10.0

Imports ($ billion) 6.8 6.3 7.5

Percent change (YoY) 17.4 19.3 20.4

Trade Balance 2.7 4.0 2.3

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


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