Cablegate: Q3 Gdp Growth of 6.1% Exceeds Expectations, but Prospects

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PP RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHJA #2140/01 3250004
ZNR UUUUU ZZH
P 200004Z NOV 08
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC PRIORITY 0756
INFO RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUCPDOC/USDOC WASHDC 1543
RHMFISS/DEPT OF ENERGY WASHINGTON DC
RUCNASE/ASEAN MEMBER COLLECTIVE
RUEHKO/AMEMBASSY TOKYO 2743
RUEHBJ/AMEMBASSY BEIJING 5631
RUEHBY/AMEMBASSY CANBERRA 3308
RUEHUL/AMEMBASSY SEOUL 5141
RHEHNSC/NSC WASHDC
RUEAIIA/CIA WASHDC

UNCLAS SECTION 01 OF 03 JAKARTA 002140

SENSITIVE
SIPDIS

DEPARTMENT FOR EAP/MTS, EAP/EP, EEB/IFD/OMA, E, EEB/ESC/IEC/ENR,
EEB/IFD/ODF
TREASURY FOR M.NUGENT AND T.RAND
COMMERCE FOR 4430 BERLINGUETTE/KELLY
ENERGY FOR PI-32/CUTLER AND GILLESPIE
DEPARTMENT PASS FEDERAL RESERVE SAN FRANCISCO FOR CURRAN
DEPARTMENT PASS EXIM BANK
SINGAPORE FOR S. BAKER
TOKYO FOR MGREWE
USDA/FAS/OA YOST, MILLER, JACKSON
USDA/FAS/OCRA CRIKER, HIGGISTON, RADLER
USDA/FAS/OGA CHAUDRY, DWYER
USTR WEISEL, EHLERS

E.O. 12958: N/A
TAGS: EFIN ECON ETRD EINV ID

SUBJECT: Q3 GDP GROWTH OF 6.1% EXCEEDS EXPECTATIONS, BUT PROSPECTS
FOR 2009 LOWERED AS VOLATILITY PERSISTS

1. (SBU) Summary: Indonesia's economy expanded at a higher than
expected 6.1% (yoy) in the third quarter of 2008, on higher
government spending, and continued strength in household consumption
and investment. While the results boosted hope that 2008 growth may
exceed 6%, most analysts have reduced 2009 growth forecasts to
between 3 and 4 percent, well below current government projections.
Indonesian currency and credit markets remain volatile, with the IDR
particularly weak, fueling more concerns of further capital
outflows. While the GOI advances efforts to secure alternative
multilateral and bilateral financing to cover the 2009 budget
deficit through a World Bank-led effort, President Yudhoyono
continues to reject publicly any consideration of seeking IMF
support. Financial market volatility appears to have prompted the
hurried sale of mid-sized PT Bank Century Tbk, which experienced
difficulties on November 13, to Bank Sinarmas. Meanwhile, a public
presentation by Bakrie Group management on November 17 failed to
boost confidence in its restructuring plans. The November 18
resumption of trading in two remaining Bakrie Group firms (Bakrie &
Brothers and Energi Mega Persada), suspended since October 7,
resulted in sharp losses and the triggering of automatic trading
halts. End summary.

Q3 GDP Results Stronger Than Expected,
But Show Early Signs of Global Slowdown
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2. (U) Q3 GDP growth of 6.1% yoy (3.5% qoq), was down from the
second quarter's 6.4% yoy growth rate, but exceeded expectations of
5.9%. 2008 economic growth through the third quarter reached 6.3%,
boosting hopes that the full-year result will exceed 6%.
Third-quarter growth remained broad-based, prior to the seizing up
of global credit markets in mid-September. Household consumption
remained strong, rising 5.3% yoy (1.9% qoq); the pace of government
spending accelerated, up 16.9% yoy (7.9% qoq); and investment
remained in double digits, with growth of 12% yoy (5.4% qoq).
Exports, which rose by 14.3% yoy, were flat from the previous
quarter, reflecting plummeting export commodity prices.

3. (U) All major production categories contributed to positive
economic growth on both a yoy and qoq basis. The transport and
telecommunications sector rose 17.1% yoy (4.2% qoq); agriculture was
up 2.4% yoy (6.7% qoq); construction rose by 7.5% yoy (3.1% qoq);
mining production rose 1.6% (yoy and qoq); manufacturing increased
4.3% yoy (3.2% qoq); trade, hotel and restaurant sectors rose by
7.6% yoy (4.6% qoq); electricity, gas and water sector grew by 10.6%
yoy (2.3% qoq); finance, real estate and company services rose by
8.5% yoy (1.8% qoq); and services grew by 6.7% yoy (0.9% qoq). On a
geographic basis, Java contributed 57.5% to GDP, Sumatera 23.8%,
Kalimantan 10.1%, Sulawesi 4.1% and remaining areas 4.5%.

4. (SBU) Most major analysts have recently reduced Indonesia's 2009
economic growth projections to 3 to 4%, as evidence mounts that the
global slowdown and credit crunch are unlikely to turn around soon.
Government officials are also tempering their growth forecasts, with
Finance Minister Sri Mulyani Indrawati stating recently 2009 growth
may reach only 5% and the chief of the Central Statistics Agency
advising November 17 that 2009 growth will be below 6%.

Volatility Continues in Financial Markets,
With Banking Sector Showing Some Nervousness
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5. (SBU) Indonesian currency, credit and equity markets remain
volatile. The IDR traded at more than 12,200/USD on November 18 and
19, but closed at 11,957/USD (BI mid-rate) on November 19. Bank
Indonesia (BI) said strong demand for dollars from firms seeking to

JAKARTA 00002140 002 OF 003

cover year-end needs had triggered further rupiah weakness. BI
Governor Boediono said November 18 BI would not allow the market to
drive the rupiah to "irrational" levels. It is unclear how BI
intends to accomplish this. As BI has reduced somewhat its recent
interventions in the currency markets after seeing a sharp decline
in reserves, rupiah volatility has increased. Yields on the
benchmark ten-year government bond have also risen to nearly 16.76%
on November 19. The stock market has also continued to slide, with
the Jakarta Composite Index down another 6.77% from November 17-19,
and off its January highs by over 58%.

6. (SBU) Tight liquidity and market volatility appear to have
prompted the hurried conclusion of a letter of intent to purchase
70% of the shares of PT Bank Century by PT Sinar Mas Multiartha Tbk
on November 16. Bank Century had experienced what BI described as
"technical" difficulties on November 13, when it failed to provide
IDR 5 billion to BI's clearing system. While BI issued a statement
on November 14 stating that Bank Century had provided the needed
funds and was operating normally on November 14, and that the
Indonesian banking system remained stable, it appears Bank Century
was experiencing more than minor difficulties. BI has denied that
it played any role in the sale of the bank. (Note: The IMF res rep
told Embassy that the acquisition was not ideal, given that members
of the Sinar Mas Group's Wijaya family had earlier been banned from
banking in Indonesia as a result of the misuse of Bank Indonesia
liquidity credits during the Asian financial crisis. End note.)

7. (U) Meanwhile, a PT Bahana Securities trader was detained
November 16 on suspicion of spreading false rumors, reportedly after
forwarding an e-mail which originated from Singapore which alleged
runs were occurring on a number of Indonesian banks. The police are
reportedly investigating a number of such cases.

While Business Community Seeks Full Guarantee
On Deposits and Other Steps To Help Cushion
the Real Economy
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8. (SBU) The Yudhoyono administration continues to consider
additional policy responses aimed at minimizing the impacts of the
financial crisis on the real economy. As reports of industry
layoffs and defaults by wholesale buyers of commodity and
non-commodity shipments grow, the Indonesian business community has
pressed the government to take additional steps to support the
domestic market. One local business chamber leader told the Embassy
that President Yudhoyono had pushed BI Governor Boediono to issue a
"full" guarantee on banking deposits, in order to prevent capital
flight and improve liquidity. (Note: the previous increase in bank
deposit limits was authorized by presidential regulation and
effected in a regulation issued by the Indonesia Deposit Insurance
Corporation. End note.) Kadin, the Chamber of Commerce and
Industry, has also continued to press for BI to begin reducing
interest rates and to guarantee interbank lending.

9. (SBU) As additional signs of a slowdown in the domestic economy
emerge, BI faces growing pressure to ease monetary policy and take
further steps to improve liquidity. Its decision to maintain a 9.5%
policy interest rate on November 6 has been portrayed by some local
market observers as ultra-conservative, though most international
analysts continue to focus on tighter monetary policy as BI's main
tool to prevent a disorderly depreciation of the rupiah.
Indonesia's recent imposition of regulations on foreign currency
transactions on November 13 has failed to stem rupiah weakness or
reduce volatility in local markets.

JAKARTA 00002140 003 OF 003

Efforts to Secure Alternative Financing
to Cover 2009 Budget Deficit Continue
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10. (SBU) The government has continued efforts to mobilize
additional external financing to protect against possible
continuation of the credit crunch into 2009, deemed by market
analysts as essential for reassuring currency and credit markets.
Sources have told Embassy that plans are advancing for a package of
so-called "stand-by loans" valued at about $5.5 billion over two
years, led by the World Bank, with bilateral lending support from
Australia, Japan, France and China. The structure of the package
would reportedly be as follows: Year 1 - World Bank ($1.4 billion),
bilaterals (total of $1.4 billion); Year 2 - same breakdown. Other
sources advise that the package is still a work in progress, with
final decisions on bilateral participation still pending.
Diplomatic sources also told Embassy that Japan intends to make an
announcement at the upcoming East Asia Summmit about an assistance
package for the region, including for Indonesia. Meanwhile,
President Yudhoyono and other officials continue to reject publicly
any consideration of seeking access to IMF financing, including its
new Short-term Lending Facility.

Bakrie Group Share Prices Continue to Slide,
As Public Statement Fails To Reassure Markets
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11. (SBU) During a public presentation by Bakrie Group management on
November 17, company officials failed to provide confidence to
markets regarding its restructuring plan. Company officials
admitted that the planned sale of a 35% share of Bumi Resources to
Northstar Pacific Partners and Texas Pacific Group may face a price
adjustment as some lenders holding pledged Bumi shares may have
already sold the shares. Management also admitted that Bakrie &
Bros. had defaulted on two repurchase agreements valued at IDR 134.9
billion (about USD $12 million). The November 18 resumption of
trading in two remaining Bakrie Group firms (Bakrie & Brothers and
Energi Mega Persada), suspended since October 7, resulted in sharp
losses and the triggering of automatic trading halts. Bumi shares
had briefly stabilized on November 14, following a November 13
announcement of a planned $700 million share buy-back. They have
since resumed their slide, losing an additional 26% from November
17-19, bringing the decline in Bumi's share price to over 78% since
September 22.

HUME

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