Identifier
Created
Classification
Origin
06JAKARTA7340
2006-06-09 09:06:00
UNCLASSIFIED
Embassy Jakarta
Cable title:  

INDONESIA - ECONOMIC AND FINANCIAL HIGHLIGHTS MAY

Tags:  EFIN EINV ECON PGOV ID 
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FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 5591
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
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RUEHBJ/AMEMBASSY BEIJING 3469
RUEHBY/AMEMBASSY CANBERRA 9578
RUEHUL/AMEMBASSY SEOUL 3672
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UNCLAS SECTION 01 OF 05 JAKARTA 007340 

SIPDIS

SIPDIS

DEPT FOR EAP/MTS AND EB/IFD/OMA
TREASURY FOR IA-JEWELL
COMMERCE FOR 4430/GOLIKE
DEPARTMENT PASS FEDERAL RESERVE SAN FRANCISCO
DEPARTMENT PASS EXIM BANK

E.O. 12598: N/A
TAGS: EFIN EINV ECON PGOV ID
SUBJECT: INDONESIA - ECONOMIC AND FINANCIAL HIGHLIGHTS MAY
2006


UNCLAS SECTION 01 OF 05 JAKARTA 007340

SIPDIS

SIPDIS

DEPT FOR EAP/MTS AND EB/IFD/OMA
TREASURY FOR IA-JEWELL
COMMERCE FOR 4430/GOLIKE
DEPARTMENT PASS FEDERAL RESERVE SAN FRANCISCO
DEPARTMENT PASS EXIM BANK

E.O. 12598: N/A
TAGS: EFIN EINV ECON PGOV ID
SUBJECT: INDONESIA - ECONOMIC AND FINANCIAL HIGHLIGHTS MAY
2006



1. Summary. On May 31, the Central Bureau of Statistics
(BPS) announced a slight increase in consumer price
inflation, at 15.6 year-on-year (YoY) and 0.4 percent month-
on-month (MoM). BPS also announced on May 15 first quarter
GDP growth of 4.6 percent YoY, the slowest pace in two
years. On May 9, Bank Indonesia (BI) cut its benchmark rate
by a quarter point to 12.5 percent, after five months at
12.75 percent, and maintained it at that level at its June 6
monetary policy board meeting. The Jakarta Stock Exchange
(JSX) Composite Index fell by 15.2 percent from May 15 -
June 8 in line with volatility in other emerging markets.
After strong appreciation in the first quarter, the rupiah
experienced significant volatility against the USD beginning
in mid-May, hitting a four-month low of 9,420/USD on May 16.
The rupiah closed at Rp 9,395/USD on June 8. Moody's Rating
Service upgraded Indonesia's sovereign bond rating from B2
to B1 on May 19. Also on May 19, Moody's raised the ratings
of the constrained foreign currency debts and deposits of
nine Indonesian banks to "stable." On May 29, the
Government of Indonesia (GOI) said it would repay its USD
7.8 billion standby reserves loan to the International
Monetary Fund (IMF) three years ahead of schedule. On May
30, Indonesia's largest lender, state-owned Bank Mandiri,
reported a 1.8 percent decline in its after tax profit in Q1
2006, partly due to high interest costs. On May 30,
Indonesia's third largest state-owned bank, Bank Rakyat
Indonesia (BRI),announced a plan to write-off loans to
earthquake victims in Yogyakarta. This report uses an
exchange rate of Rp 9,220 per 1 USD. End Summary.

Inflation Rises Slightly in May
--------------


2. On May 31, BPS announced that the Consumer Price Index
(CPI) rose 15.6 percent YoY, and 0.4 percent MoM in May

2006. Higher clothing prices, surprisingly, were a main
driver of the increase. Core inflation also increased
slightly to 9.5 percent (YoY) from 9.4 percent in the

previous month.

--------------
Table 1: Inflation Components - May 2006
--------------
Component MoM YoY
--------------
Foodstuffs 0.3 16.5
Prepared food, beverages,
Tobacco 0.3 12.8
Housing, water, electric, fuel 0.3 12.8
Clothing 2.0 10.3
Health 0.6 7.3
Education, recreation/sports 0.1 8.0
Transportation, communication
and financial services 0.2 30.9
--------------
Total 0.4 15.6
--------------
Source: Central Bureau of Statistics (BPS)

Q1 GDP Growth Slows and Unemployment Rises
--------------


3. On May 15, BPS announced that GDP growth in the first
quarter of 2006 slowed to 4.6 percent YoY, the weakest
quarterly YoY growth rate in almost two years. In
comparison, real GDP grew 4.9 percent in Q4 2005.
Government expenditures did not rise as much as expected,
increasing only by 14.1 percent YoY after expanding 29.8
percent Q4 2005. Coordinating Minister for the Economy
Boediono admitted that the GOI had failed to accelerate
spending in the first four months of the year due to
regional and central government bureaucratic delays. A
Ministry of Finance budget realization data for Q1 2006
showed the GOI had only spent about Rp 3.5 trillion (USD 380
million) of a budgeted Rp 62.9 trillion (USD 6.8 billion) in
capital expenditures during the first quarter, and about Rp
4.2 trillion (USD 455.5 million) of a budgeted Rp 36.9
trillion (USD 4 billion) in social spending. Realized

JAKARTA 00007340 002 OF 005


transfers to regions were much closer to their budgeted
levels at Rp 49.3 trillion (USD 5.3 billion),or 22.4
percent of the full year Rp 220.1 trillion (USD 23.9
billion) target.


4. Private consumption growth also slowed to 3.2 percent,
compared with 4.2 percent in the previous quarter, with
analysts citing high consumer interest rates and higher fuel
prices as the culprits. Retail sales in the auto sector,
for example, plunged by nearly 45 percent year-on year to
below 80,000 units in the first quarter. "People are still
feeling the impact of the fuel price increase last year, and
high interest rates have prevented a pickup in economic
growth", said Bank Danamon President Director Sebastian
Paredes. Exports, however, rose a robust 10.8 percent YoY
in Q1 2006 versus 7.4 percent in Q4 2005. Investment growth
increased slightly to 2.9 percent on a YoY basis, boosted by
strong inflows of foreign direct investment (FDI).


5. On June 1, BPS also reported that the Indonesian
workforce reached 106.3 million in February 2006, an
increase of 500,000 YoY. The unemployment rate as of
February 2006 was 10.4, slightly higher than the February
2005 level of 10.3 percent. Only about 40-50 percent of
Indonesia's workforce is in the formal sector.

Table 2: Indonesian YoY Real GDP Growth:
--------------

A. By Production Category

Production Category Pct Change (YoY) Share
Q1-06 Q4-05 of GDP
vs vs
Q1-05 Q4-04
-------------- --------------
Manufacturing 2.0 2.9 28.7
Agriculture 3.9 5.5 13.4
Retail, Hotel, Rest. 4.2 6.0 15.0
Mining 7.0 1.9 10.5
Services 5.4 6.0 9.8
Finance and Leasing 5.1 5.2 8.3
Construction 7.2 6.9 6.4
Transp. and Communication 11.0 10.8 7.0
Electricity, Gas, Water 5.2 6.1 0.9
-------------- --------------
Total (categories weighted) 4.6 4.9 100.0


B. By Expenditure Category

Expenditure Category Pct Change (YoY) Share
Q1-06 Q4-05 of GDP
vs vs
Q1-05 Q4-04
-------------- --------------

Household Consumption 3.2 4.2 58.9
Government Expenditure 14.2 30.0 6.9
Investment 2.9 1.8 21.6
Exports 10.8 7.4 42.8
Imports 5.1 3.7 34.8

Source: Central Bureau of Statistics (BPS)

Bank Indonesia Cuts Interest Rate to 12.5 Percent
-------------- --------------


6. BI cut its benchmark interest rate on May 9 to 12.5
percent, after holding rates steady at 12.75 percent since
December 6, 2005. At its June 6 board meeting, BI
maintained the interest rate at that level. In a June 6
statement, BI Governor Burhanuddin Abdullah noted
significant outflows of foreign capital in May created some
pressure on the rupiah and pass-through inflation, but said
inflation numbers and banking indicators are still
manageable.

Stock Market and Rupiah Volatility
--------------

JAKARTA 00007340 003 OF 005




7. In line with stock markets in other emerging markets, the
Jakarta Stock Exchange (JSX) Composite Index underwent a
major correction in the second half of May, shedding more
than USD 10 billion in market value. The sell-off continued
through June 8, with the JSX composite index closing at
1241.3, a decrease of 15.2 percent since May 15. The
President Director of the JSX said on May 23 that unlike
some exchanges, JSX does not have authority to temporarily
suspend trading in case of excess volatility, but must
request permission from the Capital Markets Supervisory
Authority (BAPEPAM). The JSX composite index had risen more
than 14 percent from January 1 to May 15, 2006.


8. After strong appreciation in the first quarter, the
rupiah also came under pressure in the second half of May
when volatility struck many emerging markets. The rupiah
hit a four-month low of Rp 9,420/USD on May 16, recovered to
Rp 9,220/USD by the end of May, but again came under
pressure in early June, closing at Rp 9,395/USD on June 8.
BI Governor Burhanuddin Adbullah told the media he saw "no
fundamental reasons" behind the rupiah's depreciation, and
said BI would "continue to guard the rupiah and to be in the
market," according to Dow Jones Newswires.

Moody's Upgrades Sovereign Ratings for Indonesia
-------------- ---


9. On May 19, Moody's Investor Service upgraded Indonesia's
foreign currency country ceiling for bonds and the foreign-
and domestic-currency government bond ratings to "B1" from
"B2", citing improved fiscal health (Moody's B1 rating is
four notches below investment grade.) Moody's also upgraded
the foreign currency country ceiling for bank deposits to
"B2" from "B3", while the local currency bank deposit
ceiling and the local currency guideline remained unchanged
at "Baa2". Moody's said further upgrades would depend on
the maintenance of sound government finances, improvements
in the investment climate, and increased foreign direct
investment. Standard and Poor's Ratings Services rates
Indonesia's sovereign credit four notches below investment
grade, while Fitch rates Indonesia's sovereign debt three
notches below investment grade.

Bank Rating Upgrades
--------------


10. Also on May 19, Moody's announced it had raised the
ratings of the constrained foreign currency debts and
deposits of nine Indonesian banks. The revised ratings
carry a "stable" outlook. According to Moody's, the
increase in the subordinated debt ratings of state-owned
banks reflects the government's enhanced ability to support
the banking system given its increased resources. Non-prime
short-term deposit and bank financial strength ratings of
all the nine banks were unaffected. On May 23 Fitch also
upgraded national ratings for eight Indonesian banks and
support ratings for two banks, Buana and NISP.

--------------
Table 3: Indonesian Bank Ratings Upgrades
--------------
Bank/Rating Agency Previous Upgrade
--------------
Mandiri
Subordinated debt Moody's B2/B3 B1/B1
Long-term deposit Moody's B3 B2
National long-term Fitch A AA

BNI
Subordinated debt Moody's B2/B3 B1/B1
Long-term deposit Moody's B3 B2
National long-term Fitch BBB+ A+

BCA
National long-term Fitch A- AA

BRI

JAKARTA 00007340 004 OF 005


Subordinated debt Moody's B3 B1
Long-term deposit Moody's B3 B2
National long-term Fitch A+ AA+

BTN
Long-term deposit Moody's B3 B2

Danamon
Subordinated debt Moody's B2 B1
National long-term Fitch A- AA-

BII
Subordinated debt Moody's B2 B1
Long-term deposit Moody's B3 B2
National long-term Fitch BBB+ AA-

Niaga
Subordinated debt Moody's B2 B1
Long-term deposit Moody's B3 B2

Permata
Long-term deposit Moody's B3 B2

Panin
Long-term deposit Moody's B3 B2

NISP
National long-term Fitch A- AA+
Support Fitch 4 3

Buana
National long-term Fitch A- AA+
Support Fitch 4 3

Source: XFN-Asia, Fitch Ratings

Bank Mandiri Q1 Loss, New Directors
--------------


11. On May 30, Indonesia's largest state-owned bank, Bank
Mandiri, reported a 1.8 percent decline in first-quarter
after-tax profit to Rp 510 billion (USD 55.3 million). The
bank's profits declined partly due to high interest costs.
Total assets of the bank rose 2.2 percent YoY to Rp 254.9
trillion (USD 27.6 billion),while total loans expanded 5.6
percent to Rp 105.1 trillion (USD 11.4 billion). Mandiri's
net non-performing loan ratio (NPL) fell to 15.8 percent in
the first quarter from 16 percent at the end of December,
while its gross NPLs increased to 27.7 percent from 26
percent. The bank said it aims to reduce its net NPL ratio
to 5 percent by the end of 2007. Shareholders also approved
distribution of 50 percent dividend, or Rp 302 billion (USD
32.8 million) of 2005 net profit


12. On May 23, Mandiri shareholders ratified the appointment
of five new directors and the removal of Finance Director
J.B. Kendarto. The shareholders also approved the
appointment of President Commissioner Edwin Gerungan to the
additional role of Independent Commissioner. Mandiri's
Board of Directors now has eleven members, while the Board
of Commissioners has seven. Mandiri President Director Agus
Martowardojo said that the expansion was needed to improve
performance.

Indonesia Says It Will Repay IMF Early
--------------


13. Indonesian President Susilo Bambang Yudhoyono (SBY)
announced on May 23 that Indonesia would repay the USD 7.7
billion remaining of its standby reserve loan with the
International Monetary Fund (IMF) in two tranches, one each
in 2006 and 2007. Yudhoyono emphasized that early repayment
to IMF is important to increase the GOI's credibility and
improve market confidence. While many analysts believe
Indonesia can easily afford the repayment -- FX reserves
were USD 44.2 billion as of May 29 -- some have questioned
the timing given the recent bout of emerging market
volatility. The GOI did not immediately announce a schedule

JAKARTA 00007340 005 OF 005


for the repayments, but said the first could come as early
as June.

BRI Writes Off Loans for Earthquake Victims
--------------


14. Indonesia's third largest bank, the state-owned Bank
Rakyat Indonesia (BRI) announced on May 30 that it would
write-off Rp 140 billion (USD 15.2 million) in loans for its
earthquake affected customers in Yogyakarta. BRI's total
loans to the region are Rp 339 billion (USD 36.8 million),
or 0.95 percent of total loans nationwide. "With the write-
off, potential loss from interest payment is Rp 30 billion
(USD 3.3 million)," BRI's President Director Sofyan Basir
told the press. BRI budgeted RP 265 billion (USD 28.7
million) for disaster write-offs in 2006.

-------------- --------------
Table 4: Selected Economic, Financial, and Trade
Statistics, February - May 2006
-------------- --------------
Feb Mar Apr May

CPI inflation (YoY) 17.92 15.74 15.4 15.60

CPI inflation (MoM) 0.58 0.03 0.05 0.37

Rp/USD Exch. rate(1) 9,185 9,075 8,775 9,220

30-day SBI rate (1) 12.74 12.73 12.75 12.50

Foreign Res. (USD bn)(1) 35.5 40.1 42.8 44.2

JSX Composite Index(1) 1230.7 1323.0 1464.4 1330.0

Exports (USD billion) 7.35 7.45 7.6

Percent change (YoY) 15.18 2.76 11.9

Imports (USD billion) 4.51 4.35 4.8

Percent change (YoY) 4.47 -12.65 -3.7

Trade Balance 2.84 3.10 2.8

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

PASCOE