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Cablegate: Bank Indonesia Maintains Policy Rate As Growth Outlook

VZCZCXRO4400
RR RUEHCHI RUEHCN RUEHDT RUEHHM
DE RUEHJA #2057/01 3110950
ZNR UUUUU ZZH
R 060950Z NOV 08
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 0562
RUEATRS/DEPT OF TREASURY WASHINGTON DC
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC
RUEHKO/AMEMBASSY TOKYO 2692
RUEHBJ/AMEMBASSY BEIJING 5581
RUEHBY/AMEMBASSY CANBERRA 3251
RUEHUL/AMEMBASSY SEOUL 5094
RUEHGP/AMEMBASSY SINGAPORE 6368
RUEAIIA/CIA WASHDC

UNCLAS SECTION 01 OF 02 JAKARTA 002057

SIPDIS
SENSITIVE

DEPT FOR EAP/MTS, EAP/EP AND EEB/IFD/OMA
TREASURY FOR IA/MALACHY NUGENT AND TRINA RAND
COMMERCE FOR 4430/KELLY
DEPT PASS FEDERAL RESERVE SAN FRANCISCO FOR CURRAN
DEPARTMENT PASS EXIM BANK
SINGAPORE FOR SBAKER
TOKYO FOR MGREWE
USDA/FAS/OA YOST, MILLER, JACKSON
USDA/FAS/OCRA CRIKER, HIGGISTON, RADLER
USDA/FAS/OGA CHAUDRY, DWYER
DEPT PASS USTR WEISEL, EHLERS

E.O. 12598: N/A
TAGS: EFIN EINV ECON EAGR ID
SUBJECT: BANK INDONESIA MAINTAINS POLICY RATE AS GROWTH OUTLOOK
DETERIORATES

1. (SBU) Summary. Bank Indonesia (BI) held its overnight policy
rate steady at 9.5% on November 6, in response to growing signs of a
slowdown in economic activity in Indonesia. A moderation in
inflation in October also contributed to the decision. While most
market analysts expected BI to hold rates constant, some observers
worry that higher rates will be necessary to discourage capital
flight and support the value of the Rupiah (IDR). BI's official
reserves fell $6.5 billion to $50.6 billion during the month of
October, due in large part to foreign exchange market intervention.
The Rupiah closed at 11,098 IDR/USD on November 6, according to BI.
End Summary.

Signs of Slower Economic Activity Emerge
----------------------------------------
2. (SBU) BI held its policy rate constant on November 6, in response
to growing signs of a slowdown in economic activity. Exports
contracted 2.2% month-on-month (mom) in September as world demand
and the price of Indonesian export commodities declined. Imports
also contracted, falling 6.7% mom, due to lower world oil prices and
slower domestic demand. Preliminary third quarter 2008 data from
the manufacturing sector also point to a softening in economic
activity. Growth in the manufacturing sector as a whole slowed to
1.6% yoy in the third quarter, down from 5.9% yoy and 3.3% in the
first and second quarters, respectively. The sharpest declines
occurred in the textile (30.6% yoy), machinery and equipment (17.3%
yoy), and chemical (13.0% yoy) sectors. Anecdotal information from
local bankers also points to significant tightening in USD credit
funding for Indonesian firms in recent weeks, raising their funding
costs and straining profits. Tigor Siahaan, Managing Director and
Country Business Manager for Citibank Indonesia, also predicted new
entrants to the palm oil sector would come under increased financial
pressure, given declining values of their inventories and future
harvests and limited cash flow. The Government of Indonesia will
release official third quarter 2008 GDP figures on November 15.


Inflation Cools in October, but IDR Remains Weak
--------------------------------------------- ---
3. (U) BI also based its decision on moderating price trends.
Consumer price increases eased in October, rising 0.45% mom. The
yoy inflation rate fell to 11.8% from 12.1% in September. Food
price increases also moderated in October, with mom food price
inflation slowing to 0.71% compared with 1.9% in September. The yoy
pace of food price inflation also fell, moving from 20.1% in
September to 19.0% in October. Retail food prices for palm oil,
rice, and soybeans have begun to fall, easing pressure on household
incomes, according to local data collected by the Foreign
Agricultural Service. Unbranded palm oil prices fell 6.4% during
the month of October, while rice and soybean prices dropped 3.4%,
and 4.1% over the same period. An Indonesian pancake vendor
recently noted to the local press that this is the first time input
prices have declined in the five years he has been in business.
The price of chicken, eggs, flour and instant noodles have been
slower to adjust, rising or falling only slightly during October
2008.

4. (SBU) While domestic sources of inflation have eased, BI's
decision to hold rates constant may increase pressure on the IDR,
raising the risk of imported inflation. The IDR/USD exchange rate
continued to lose value in October as investor demand for IDR
denominated assets declined. The IDR has depreciated roughly 16.2%
during the past month, and is down 21.3% year to date. The
depreciation in the IDR is generally in line with other currencies
in the region year-to-date, although the IDR has declined more
significantly than other currencies in recent weeks. BI continues
to intervene actively in foreign currency markets to support the
IDR, as indicated by the $6.5 billion decline in official foreign
currency reserves in October. BI's November 6 press release noted
that the central bank intends to continue to intervene in the

JAKARTA 00002057 002 OF 002


foreign exchange markets to prevent sharp fluctuations in the IDR.
However, analysts note that BI's ability to control currency
movements in the face of significant capital outflows is limited.

HUME

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