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Cablegate: Singapore Perspectives On Indonesia's Economic

This record is a partial extract of the original cable. The full text of the original cable is not available.





E.O. 12958: N/A


1. (U) Summary: Singapore-based financial analysts believe
that Indonesia's economic problems are not a harbinger of
another Asian financial crisis, and that the risk of
contagion is small given Indonesia's much stronger
fundamentals compared to 1997-98. Although generally
optimistic about Indonesia's growth prospects through 2006,
the analysts remained skeptical that Jakarta would correct
its inappropriately loose monetary policy. Indonesia, they
said, would move to reduce fuel subsidies, but needed also to
move on what they saw as the real problem -- rapid growth of
the money supply. End summary.

2. (U) We met with Singapore-based financial analysts
Claudio Piron (JP Morgan Chase), Ray Farris (Credit
Suisse-First Boston), and Euben Paracuelles (DBS Bank) on
September 22. Piron expressed confidence that President
Yudhoyono would be successful in removing Indonesia's
controversial fuel subsidies over the next several months.
Financial analysts' estimates on how large the first cut in
October would be range from 30 percent to 50 percent, but the
exact number would be less important than the signal Jakarta
would send by taking action, Piron said. A subsidy cut in
this range would send an important sign to investors that
Jakarta was serious about taking the tough steps necessary to
get the economy back on track.

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3. (SBU) Ray Farris of Credit Suisse First Boston agreed
that Jakarta seemed poised to tackle the fuel subsidies
issue. He argued, however, that the government's focus on
the fuel subsidies shifted attention from the real problem,
one it is not prepared to address -- Bank Indonesia's overly
loose monetary policy. The rupiah, he pointed out, did not
suddenly start depreciating a few weeks ago; it had, in fact,
steadily lost value since February 2004, long before oil
prices were an issue. The monetary base was too large in
February 2004, Farris explained, and the government
subsequently allowed it to grow too quickly. As a result,
Indonesia's inflation rate was well above the global trend,
and rising. While the removal of fuel subsidies will help
mitigate the government's debt-sustainability problem, it
will not have a major impact on inflation or the currency,
Farris concluded.

4. (SBU) Farris stressed that the solution to Indonesia's
economic woes was "simple": the government must raise
interest rates significantly. The central bank was expected
to move by about 25 basis points in October if other global
central banks raise rates, but that would not be enough,
explained Farris. He argued that Bank Indonesia (BI) would
need to ratchet monetary growth down to at most eight
percent, and preferably five percent, if it were to rein in
inflation to a reasonable, more sustainable level. Failure
to do so would have serious implications for the country's
investment strategy. Currently, Indonesia's real interest
rates are close to zero, and bond yields are not far above
those in the United States, he said. Under these
circumstances, what incentive did investors have to hold
Indonesian risk, he asked. Piron agreed, noting that smart
investors were staying away from Indonesian debt.

5. (SBU) Farris held out little hope that this path would be
followed, in large part because the Indonesian government did
not believe that its loose monetary policy was flawed. "The
wrong people" are running BI, he observed, and they have
refused to significantly tighten monetary policy out of fear
that they would deal a body blow to Indonesia's wobbling
demand-led growth. BI failed to understand that its job was
not to manufacture growth by expanding the money supply, but
rather to foster a stable monetary environment conducive to
investment, Farris said. Paracuelles agreed, citing the lack
of a political consensus among the leadership for any
dramatic changes in policy direction. He noted that Vice
President Yusuf Kalla was an especially strong supporter of
continued loose monetary policy. Kalla had also advocated
stronger action on fuel subsidies -- arguing that they should
be completely removed in October instead of gradually reduced
as the government now intends to do -- possibly as a way of
alleviating some of the pressure to raise interest rates,
Paracuelles said.


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