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Cablegate: New Bank Indonesia Chief Faces Tough Environment

VZCZCXRO7394
RR RUEHCHI RUEHCN RUEHDT RUEHHM
DE RUEHJA #0721/01 1001049
ZNR UUUUU ZZH
R 091049Z APR 08
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 8615
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHRC/USDA FAS WASHDC
RUEHKO/AMEMBASSY TOKYO 1777
RUEHBJ/AMEMBASSY BEIJING 4899
RUEHBY/AMEMBASSY CANBERRA 2293
RUEHUL/AMEMBASSY SEOUL 4513
RUEAIIA/CIA WASHDC

UNCLAS SECTION 01 OF 02 JAKARTA 000721

SIPDIS

SIPDIS
SENSITIVE

DEPT FOR EAP/MTS AND EB/IFD/OMA
TREASURY FOR IA-SETH SEARLS AND JWEEKS
SINGAPORE FOR SBAKER
TOKYO FOR MGREWE
COMMERCE FOR 4430/
DEPARTMENT PASS FEDERAL RESERVE SAN FRANCISCO FOR TCURRAN
DEPARTMENT PASS EXIM BANK
USDA/FAS/OA YOST, MILLER, JACKSON
USDA/FAS/OCRA CRIKER, HIGGISTON, RADLER
USDA/FAS/OGA CHAUDRY, DWYER

E.O. 12598: N/A
TAGS: EFIN EAGR ECON PGOV PINR ID
SUBJECT: NEW BANK INDONESIA CHIEF FACES TOUGH ENVIRONMENT

REF: Jakarta 00355

1. (SBU) Summary: Parliament's Finance Commission overwhelmingly
approved the appointment of Coordinating Minister for Economic
Affairs Boediono to fill the post of Bank Indonesia (BI) Governor.
Analysts expect Boediono to maintain the central bank's strong
record of prudent monetary policy and independence from political
interference. Boediono takes the reigns of the central bank in an
increasingly difficult operating environment, as inflation surges,
global economic conditions deteriorate, and the central bank faces
corruption scandals. The appointment leaves a hole in the
government's economic team and raises questions as to who will
replace Boediono at the coordinating ministry. End Summary.

Boediono Approved as Central Bank Head
---------------------------------------

2. (U) Parliament's Finance Commission XI approved the appointment
of Coordinating Minister for Economic Affairs Boediono as central
bank governor by a 45 to 1 margin. Parliament had rejected the
President's previous two candidates for the job, raising concerns
about growing political tensions between the Parliament and the
President (reftel). Parliamentarians praised Boediono's knowledge
of monetary affairs and policymaking experience, citing his current
role as Coordinating Minister for Economic Affairs and his previous
post as Minister of Finance. Boediono also served as a senior
official at BI during the 1990s.

3. (U) Analysts expect the new Governor to maintain BI's strong
record of prudent monetary policy and independence from political
interference. Observers also expect him to improve policy
coordination on financial stability issues. Boediono's image as a
clean and competent government official will help restore the
central bank's image in the wake of graft allegations leveled
against the current Governor and other senior officials this year.
With post-graduate degrees from the University of Pennsylvania and
Monash University in Australia, Boediono enjoys a solid reputation
as a technocrat and reformer both at home and abroad.

Macroeconomic Pressures Mount
-----------------------------
4. (SBU) Boediono takes the reigns of the central bank as inflation
surges and global economic conditions deteriorate. Rising global
food and oil prices have heightened concerns that BI may need to
raise rates this year. CPI inflation now stands at 8.2% (YoY), above
the 8.0% BI policy rate. Yet higher interest rates would dampen
domestic demand at the same time sluggish global growth constrains
expansion of Indonesia's exports. The uncertainty surrounding U.S.
financial institutions and markets has increased risk aversion
toward emerging markets such as Indonesia, even though Indonesia's
banking system is relatively healthy with little exposure to U.S.
subprime mortgages. Combined with lagging reform momentum in
advance of the presidential and general elections in 2009, market
analysts worry foreign and domestic investors may begin to retreat
from Indonesia markets, putting downward pressure on the currency
and reducing Boediono's ability to stimulate growth.

Boediono's Departure Leaves Hole in Economic Team
--------------------------------------------- -----
5. (SBU) Boediono's appointment ends speculation on who will run the
central bank, but leaves a hole in the government's economic team.
The role of Coordinating Minister for Economic Affairs is important
to interagency policy coordination, a frequent problem in Indonesia,
and to establishing overall economic policy. Recent press reports
claim that the President is considering placing Vice President Jusuf
Kalla in the vacant post, giving him a dual role in the government.
While Kalla enjoys strong support in Parliament, analysts worry that
the frequent policy disputes between Finance Minister Sri Mulyani
Indrawati and Kalla will increase interagency acrimony and undermine
economic policymaking. Analysts also consider Minister Mulyani, in a
dual role as Finance and Coordinating Minister, and Raden Pardede,
who parliament rejected for the BI Governorship, as frontrunners for

JAKARTA 00000721 002 OF 002


the job. Other candidates for the position are largely
businessmen-turned-politicians including Former Coordinating
Minister for Economic Affairs Rizal Ramli, Ministry of Industry
Official Fahmi Idris, Former Minister for Cooperatives and SMEs Adi
Sasono, and Minister of Energy and Natural Resources Purnomo
Yusgiantoro.

HUME

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