INDONESIA - ECONOMIC AND FINANCIAL HIGHLIGHTS

UNCLAS SECTION 01 OF 05 JAKARTA 013420

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TAGS: EFIN EINV ECON PGOV ID
SUBJECT: INDONESIA - ECONOMIC AND FINANCIAL HIGHLIGHTS
OCTOBER-NOVEMBER 2006


1. Summary. The Central Bureau of Statistics (BPS)
announced on November 16 that Indonesia's GDP growth reached
5.5% in the third quarter of 2006 on a year-on-year (YoY)
basis, the highest quarterly growth rate since the third
quarter of 2005. YoY consumer price inflation (CPI) dropped
significantly to 6.3% in October and 5.3% in November as the
BPS's inflation calculations incorporated the effects of the
October 2005 fuel price hikes. Bank Indonesia (BI) cut its
policy rate by 50 basis points on November 7, bringing the
BI rate to 10.25%. On November 16, the Government of
Indonesia (GOI) sold its remaining shares in Bank
Internasional Indonesia (BII) and Lippo Bank for Rp 514
billion (US$ 56 million). As part of a restructuring of the
Ministry of Finance, on November 1 Minister of Finance Sri
Mulyani Indrawati swore in ten new senior officials,
including a new Secretary General and five new Directors
General. On November 29, Parliament confirmed Muliaman D.
Hadad and Budi Rochadi as BI Deputy Governors, replacing
Maman H. Soemantri and Maulana Ibrahim. On October 5, BI
issued a new policy package designed to promote
consolidation in the banking industry. The GOI repaid the
remainder of Indonesia's SDR 2.1 million (US$ 3.2 billion)
outstanding loans to the IMF on October 12. On October 10,
the Ministry of Finance (MOF) auctioned Rp 1 trillion (US$
109 million) in 2-year treasury bonds with a coupon rate of
9.25%, and on October 17, the MOF swapped bonds totaling Rp
4.3 trillion (USD 469 million) as part of its bond re-
profiling program. Indonesia and China agreed on an
expanded, US$ 4 billion debt swap program under the Chiang
Mai Initiative on October 17. Fitch Ratings affirmed on
November 1 the ratings of Bank Central Asia (BCA),Bank
Rakyat Indonesia (BRI) and Bank Niaga, Indonesia's second,
fourth, and seventh largest banks respectively. Bank
Permata and Lippo Bank issued subordinated debt in November
2006 totaling US$ 255 million. End Summary.

GDP Growth Accelerates While Inflation Slows
--------------


2. On November 16, BPS announced that Indonesia's economy
expanded by 5.5% YoY in the third quarter, the highest
growth rate since the third quarter of 2005. Strong growth
in exports drove the expansion in GDP, with exports of goods
and services rising 12.1% YoY during the quarter. On
November 1, BPS announced that Indonesia's headline CPI
inflation had dropped to 6.3% in October 2006 from 14.5% in
September as the agency's CPI calculations incorporated the
effects of the October 2005 fuel price hikes. YoY inflation
in November fell further to 5.3%. Month-on-month (MoM)
inflation in November fell to 0.3% from 0.9% MoM in October,
as price increases linked to the Idul Fitri holiday in late
October moderated. Transportation and communication prices
rose in October and November by only 1.7% and 1.0% YoY,
respectively, compared with the 30.2% YoY rise recorded in
September. Pressure on prices also eased for a number of
other segments. Housing costs lost momentum, increasing by
the slowest rate in more than six and a half years at 4.4%
YoY in November. Growth in food prices eased to 8% YoY in
November, down from 15.5% YoY and 10.0% YoY in September and
October, respectively. Core inflation also slowed to 5.9%
YoY in November, down from 6.9% and 9.2% YoY in the previous
two months.

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Table 1: Consumer Price Inflation Components
October - November 2006
-------------- -
Component October November
MoM YoY MoM YoY
-------------- -
Foodstuffs 2.2 10.0 0.7 8.1
Prepared food,
beverages, tobacco 0.7 7.5 0.5 5.9
Housing, water,
electric, fuel 0.3 4.8 0.3 4.4
Clothing 1.0 7.2 0.7 7.6
Health 0.3 5.6 0.4 5.4
Education,

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recreation/sports 0.1 8.3 0.0 8.0
Transportation,
communication and
financial services 0.5 1.7 -0.2 1.0
-------------- -
Total 0.9 6.3 0.3 5.3
-------------- -
Core Inflation (1) 0.7 6.9 0.3 5.9
-------------- -

(1) Core inflation excludes items that exhibit volatile
price movements, including energy and food products.

Source: Central Bureau of Statistics (BPS)

BI Cuts Reference Interest Rate to 10.25%
--------------


3. For the sixth time since May 2006, BI cut its policy rate
50 basis points to 10.25% at its November 7 monetary policy
meeting. The move followed a 50 basis point cut on October

5. Following the November 7 rate cute, Finance Minister Sri
Mulyani commented that "with the sharp slow down in
inflation, BI has room to cut rates without worrying about
reigniting price increases." However, in its statement
released after the meeting, BI cited "economic concerns
calling for vigilance in the months ahead" including
continued inflationary pressure in 2007. BI added that "the
Board of Governors...sees the need for more measured,
cautious operation of monetary policy to maintain
macroeconomic stability in the medium and long-term and
consolidate the momentum for sustainable economic recovery."
Most analysts expect BI to continue to reduce interest rates
through the end of 2006, although there is less agreement on
the pace of likely future interest rate cuts.

GOI Divests its Ownership of Two Banks
--------------


4. On November 16, the GOI, through its Asset Management
Company (PPA),earned Rp 514 billion (US$ 56 million) from
the divestment of a 5.22% stake in BII and a 0.0012% stake
in Lippo Bank. With the sales, the GOI has divested its
remaining stakes in all but two banks, Maybank (6.08%) and
BTPN (28.39%).

MOF Replaces Senior Officials
--------------


5. On November 1, Minister of Finance Sri Mulyani Indrawati
swore in ten new senior or "echelon one" officials at the
Ministry. As part of the move, the Minister formally
expanded the number of Directors General (DGs) at the
Ministry from ffive to sven, creating new DGs for ebtt
Management and Stte Assets. The new structure is designed
to strngthen the Ministry's debt management and budgeteexecution functions. Table 2 lists the names and i(tles of
the new officials.

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Table 2: Ministr of Finance--New Senior Officials
-------------- ( -------------- --------------
Previous Current
Position Position
-------------- --------------
Mulia P. Dircctor General Secretary
Nasution (DG) for State General
Treasury
Rachmad DG for Budget DG for
Rocjadi and Balanced Budgetary
Funds Affairs
Herry Director for DG for State
Purnomo State Assets Treasury
Hadiyanto Head of Legal DG for State
Bureau Assets
Mardiasmo Special Advisor DG for
on Government Balanced
Spending Funds

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Rahmat Director for DG for Debt
Waluyanto Debt Management Management
Permana Agung Special Advisor Inspector
Daradjatun on State Assets General
Eddie Former DG of Special Advisor
Abdurrachman Customs and on International
Excise Affairs
Agus Muhammad Inspector General Special Advisor
on State Assets
Marwanto Head of Public Special Advisor
Affairs Bureau on Government
Spending
Anggito Head of Fiscal Acting Head of
Abimanyu Policy Agency Fiscal Policy
Agency

Source: Ministry of Finance

Parliament Appoints New BI Deputy Governors
--------------


6. On November 27, Parliament confirmed the appointments of
BI career officials Muliaman D. Hadad and S. Budi Rochadi as
BI Deputy Governors. Hadad is currently BI's Director for
Banking Regulation and Research, and will replace departing
Deputy Governor Maman H. Soemantri. Rochadi, BI's current
Director for Banking Supervision, will replace outgoing
Deputy Governor Maulana Ibrahim. The appointments become
effective January 1,2007.

BI Issues New Policy Package
--------------


7. On October 5, BI launched a new banking policy package
that includes incentives to promote bank consolidation and
rules limiting any given individual or organization to a
single banking presence in Indonesia. The new rules provide
a host of incentives for banks to merge, including granting
consolidated banks looser lending limits, lower minimum
capital requirements, and relaxed rules for obtaining
licenses to conduct foreign exchange operations. The policy
package also sets out new definitions for related parties,
redefines the scope of lending limits for related parties,
and further clarifies the definition of parties considered
"group debtors" by virtue of their financial ties.


8. Under the new single presence rules, a single party can
own controlling interest in only one banking organization.
BI defines controlling interest as owning 25% or more of
total outstanding shares, or having direct or indirect
controlling power. Owners currently in violation of the
single presence policy will have to submit a restructuring
plan to BI by December 2007, and report quarterly on
divestiture progress starting in January 2008. The rules
mandate that violators comply with the new regulations by
December 2010, but do not specify penalties for non-
compliance.


9. As part of the package, BI also issued a new regulation
increasing the number of economic sectors considered "vital
to national economic development" for the purpose of bank
lending guidelines. Under BI regulation 7/3/2005, BI
encourages banks to lend an amount equivalent to 30% of
their capital to projects by state-owned enterprises in the
food, simple housing, oil and gas (and other energy
sources),water, electricity, and transportation
infrastructure, including roads, bridges, railways, and
aGQ+Qllion (US$ 3.2 billion) loan balance under its
International Monetary Fund (IMF) Extended Fund Facility
(EFF),four years ahead of schedule. "This loan settlement
is a signal of the increased flexibility of the Government's

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fiscal position," BI Governor Burhanuddin Abdullah stated.
A positive market response to Indonesia's first accelerated
IMF loans repayment in June 2006, as well as support by
Parliament, prompted the Government to finish paying off its
IMF debt. Despite the large repayment, Indonesia's foreign
exchange position remains strong. Analysts estimate that
the country's foreign exchange reserves will remain in the
US$ 39-40 billion range through the end of 2006, a figure
equivalent to over four months imports and short-term
foreign debt repayments. "We expect this settlement to
improve investor confidence, decrease country risk and
ultimately increase Indonesia's credit rating," added
Abdullah.

Government Debt Market Update
--------------


11. The MOF sold Rp 1 trillion (US$ 109 million) in 2-year
treasury bonds at its October 10 auction with a coupon rate
of 9.25%. Director of Treasury Bond Management Rachmat
Waluyanto said the auction would be the last for 2006 since
the MOF has already reached its 2006 financing target of Rp
60.9 trillion (US$ 6.6 billion). The projected net proceeds
(new issuances minus amortizations) from 2006 bond sales
total Rp 35.8 trillion (US$ 3.9 billion).


12. On October 17, MOF swapped bonds maturing in 2007-2009
totaling Rp 4.3 trillion (US$ 469 million) for 15-year debt
priced to yield 11.03%. On November 21, MOF earned Rp 0.9
trillion (US$ 98 million) from a similar swap of 8-year
bonds with a coupon rate of 11%. The debt swaps are the
latest in a series of MOF operations designed to smooth out
the GOI's amortization profile by reducing the amount of
bonds maturing in 2007-09.

Indonesia and China Agree On Debt Swap
--------------


13. On October 17, BI and the People' Bank of China signed
an "Amendment Agreement" to their Bilateral Swap Arrangement
under the Chiang Mai Initiative, raising the limit for short-
term bilateral currency swaps from US$ 2 billion to US$ 4
billion. The new agreement will enable Indonesia to receive
up to US$ 4 billion in short-term financing from China
through a swap mechanism if Indonesia faces short-term
liquidity constraints.

Fitch Affirms Ratings for Three Banks
--------------


14. On November 1, Fitch Ratings affirmed the ratings of
Indonesia's second largest bank, Bank Central Asia (BCA),
fourth largest bank, Bank Rakyat Indonesia (BRI) and seventh
largest bank, Bank Niaga. According to the rating agency's
website, BCA's ratings reflect its strong financial
position, including generally good asset quality and above
average capitalization, along with its steady earnings
profile. BRI's ratings reflect its strong underlying
profitability and above average asset quality, which stem
from its largely unchallenged franchise in rural micro
credit. Bank Niaga's ratings reflect its reasonably strong
profitability, an improved capital position, and parentage
in Malaysia's Bumiputra-Commerce Holdings Berhad, the
combination of which mitigate a still high level of impaired
loans.

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Table 3: Fitch Ratings for BCA, BRI, and Niaga
-------------- --------------
BCA BRI Niaga
-------------- --------------
Long-term foreign currency BB BB- BB-
Short-term foreign currency B B
National long-term AA AA+
Individual C/D C/D D
Support 4 4 4

Source: www.fitchratings.com

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Permata and Lippo Issue Sub-Debt
--------------


15. Indonesia's eighth largest commercial bank, Bank
Permata, issued subordinated bonds totaling Rp 500 billion
(US$ 55 million) on November 14. The bonds hold a tenor of
five years, with the interest rate of 150-225 basis points
above the five years bonds of the government' FR22. FR22
will be matured in 2012, with the interest rate of 12%. The
bank announced it would use the proceeds from the issue to
finance business expansion, increase its sources of long-
term funds and strengthen its capital base. On November 16,
Indonesia's ninth largest bank, Lippo Bank, issued US$ 200
million in subordinated debt carrying a coupon rate of
7.375%.

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Table 4: Selected Economic, Financial, and Trade
Statistics, August - November 2006
-------------- --------------
Aug Sep Oct Nov

CPI inflation (YoY) 14.90 14.55 6.29 5.27

CPI inflation (MoM) 0.33 0.38 0.86 0.34

IDR/USD Exch. rate(1) 9,100 9,235 9,107 9,140

30-day SBI rate (1) 11.75 11.25 10.75 10.25

Foreign Res. (US$ bn)(1) 42.0 42.3 39.9

JSX Composite Index(1) 1,431 1,534 1,583 1,719

Exports (US$ billion) 8.9 8.8 8.7

Percent change (YoY) 17.1 16.7 16.4

Imports (US$ billion) 5.6 5.7 4.5

Percent change (YoY) 2.6 4.0 3.1

Trade Balance 3.3 3.1 4.2

Source: Bank Indonesia, BPS, JSX
(1) End of period

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