Cablegate: East Java: Waiting for the Other Shoe, Isolation Is No

VZCZCXRO7736
RR RUEHCHI RUEHCN RUEHDT RUEHHM
DE RUEHJS #0121/01 3030910
ZNR UUUUU ZZH
R 290910Z OCT 08
FM AMCONSUL SURABAYA
TO RUEHC/SECSTATE WASHDC 0315
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUEHBY/AMEMBASSY CANBERRA 0154
RUEAIIA/CIA WASHDC
RHHMUNA/HQ USPACOM HONOLULU HI
RUEHJA/AMEMBASSY JAKARTA 0300
RUEHJS/AMCONSUL SURABAYA 0320
RUEHKO/AMEMBASSY TOKYO 0050

UNCLAS SECTION 01 OF 02 SURABAYA 000121

SENSITIVE
SIPDIS

DEPARTMENT FOR EAP/MTS, EAP/EP, EEB/IFD/OMA, INR/EAP,E

E.O. 12958: N/A
TAGS: ECON EFIN EFIS EIND ETRD EINV PGOV ID
SUBJECT: EAST JAVA: WAITING FOR THE OTHER SHOE, ISOLATION IS NO
INSULATION FROM GLOBAL FINANCIAL CRISIS

REF: JAKARTA 1940

SURABAYA 00000121 001.2 OF 002

Sensitive But Unclassified. Please Protect Accordingly.

1. (SBU) Summary: Uncertainty about the full extent of the
global financial crisis continues to cause a lack of liquidity
in all sectors of East Java's economy and the Indonesian economy
more broadly. This was the theme of a roundtable discussion
with visiting EAP/MTS Director Kamala Lakhdhir, which included a
Bank Indonesia official and leading East Java business people.
Participants agreed that uncertainty in short-term market prices
for finished goods and inputs and especially tight credit have
already had a serious impact on the health of East Java's
overall economy. Businesses are unable to take advantage of
dropping prices for inputs driven by low expectations for growth
due to tightening credit. Business people asked what the
United States might do to restore confidence and reverse this
trend. End Summary

2. (SBU) Congen Surabaya Principal Officer, Pol/Econ Officer
and visiting EAP/MTS Director Kamala Lakhdhir met with five
local economic observers on October 27. Each shared local views
on the current financial crisis, they were: Mr. Indra Fauzi of
Regional Economic Development Institute (REDI); Mr. Wibisono,
Deputy Director of the Bank of Indonesia (Surabaya); Mr. Frank
Pandji, Director of PT Mepoly Plastics; Ms. Erawati, Executive
Secretary of the Indonesian Textile Association; and Mr. Novi
Saputra, Marketing Director of PT. Kelola Mina Laut, a seafood
processing company.

3. (SBU) Indonesian Finance Minister Sri Mulyani has recently
both reassured and warned Indonesians that while Indonesia has
diversified its exports in the decade following the Asian
Financial crisis, it is still exposed to a downturn in the U.S.
market. Indonesia's vulnerability is the nation's strong links
to Southeast Asian markets more reliant on US consumers.
Participants touched on key indicators in each of their
industries that indicate trouble on the horizon -- in
particular, concern for the future has slowed the circulation of
cash. Shifts in commodity prices, tightening credit and a
creeping uncertainty have spawned some confusing trends.

4. (SBU) The East Java textile industry runs on polyester
staple fiber and its price is directly tied to the price of oil.
According to Ms. Erawati, recent plunging oil prices have
caused a drop in the price of polyester fiber but this hasn't
taken pressure off the industry. Paradoxically, the causes of
the fiber's price drop -- low oil prices -- are in part driven
by expectations of reduced consumption in the U.S. This same
expectation drives a lack of confidence in export industries by
Indonesian banks. Such is the uncertainty that local banks are
delaying payment of letters of credit until full terms are met,
apparently concerned that foreign customers and their financial
institutions could fail in the near term. The lack of trust
between banks and a wait-and-see attitude towards U.S. consumer
demand continues to tighten textile companies' access to credit
in what might otherwise be a profitable period.

5. (SBU) The seafood processing company, Kelola Mina Laut, has
customers on nearly every continent and has thus distributed its
risk geographically. While demand for seafood has not softened,
it has moved down the food chain towards less expensive seafood
products. Mr. Saputra sees this instability as an opportunity
for market leaders in a given sector. Companies recognized as
the most stable can now gain market share as banks and customers
put pressure on smaller competitors by choosing large, reliable
suppliers over suppliers who might go belly up.

6. (SBU) Frank Pandji's plastic hose and coupling manufacturer
could be a poster child for the sort of "unlinked" Indonesian
business presumably unharmed by the foreign market fluctuations
described by Finance Minister Sri Mulyani. However, Frank
Pandji told us that while his products target the Indonesian

SURABAYA 00000121 002.2 OF 002

market almost exclusively, he expects a delayed impact on demand
as exporters using his products see a drop in overseas demand.
Reflecting hard-won experience during the Asian financial
crisis, Mr. Pandji said he has amassed cash reserves roughly
three times his total outstanding credit in anticipation of
tightening credit.

7. (SBU) The Deputy Director of Bank Indonesia expressed
concern that rumors are driving a lot of economic behavior and
uncertainty is eroding otherwise sound banking practices. East
Java's annual inflation rate is running at 11.39%, compared to
12.58% nationally, reflecting different economic climates.
Overseas workers have a significant role in East Java's economy.
An estimated 140 million USD will come back to East Java from
overseas workers in 2008. Roughly 50% of remittances from
overseas workers are sent electronically, the rest is carried
home in cash. However, precise statistics are unavailable
because wire transfer companies are not required to report
amounts transferred, according to Wibisono. A softening labor
market at home and abroad could lead to increasing pressures on
East Java's economy. The most vulnerable among an estimated
70,000 of East Java's overseas workers could be forced out of
work abroad, and prospective overseas job seekers might be
forced to rely solely on the East Java job market. East Java's
official unemployment rate is currently 10%. However, since an
individual working only one day in the two week period preceding
the survey is counted as employed, unemployment figures
calculated on a US model would push the number to several times
its official level. Mr. Wibisono echoed the assumption of all
at the discussion that while East Java is generally insulated
from the direct impacts of sharp market fluctuations and
uncertainty, it is only a matter of time before serious
instability overseas will make itself felt in East Java.
MCCLELLAND

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