FINANCE MINISTER MEETING WITH AMBASSADOR

UNCLAS SECTION 01 OF 02 JAKARTA 002694

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TAGS: EFIN ABLD EINV ECON PGOV ID
SUBJECT: FINANCE MINISTER MEETING WITH AMBASSADOR

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1. (SBU) Summary: Minister of Finance (MOF) Sri Mulyani Indrawati
told the Ambassador on September 24 that Indonesia's growth is
strong but more infrastructure development is needed. Indonesia
needs to do more to get its good news story out, as the media paints
a very negative picture. The country's budget formulation process
is in transition, creating an interesting dynamic as the Parliament
takes on a greater role. The non-commercial aspects of the Embassy
land issue are approved: the land valuation issue will be handled by
the Ministry of Finance's Secretary General Mulia Nasution and the
Director General for Assets Mr. Hadiyanto. End Summary.

Strong Growth But Infrastructure Boost Needed
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2. (SBU) Finance Minister Mulyani welcomed the Ambassador in a
meeting on September 24, noting that the Indonesian economy is
moving along well and it is a good time to be here. The U.S.
subprime problems impact on the global economy are still unclear.
Indonesia has been slow to recover from the financial crisis of
1997-98 and poverty and unemployment are still high, but exports and
capital flows and reserves are now strong. The role of foreign
buyers of Indonesia's bonds and stocks has increased to 20% in the
last two years. It is not yet clear investors will re-profile their
portfolios and risk assessments of emerging markets. Mulyani
expects continued strong growth in the second half of 2007 above 6%
(Q2 GDP growth was 6.3%). Infrastructure development will be needed
to give growth a boost. Slow infrastructure development is also
hindering the growth of regions under decentralization. Both the
Members of Parliament (DPR) and the Cabinet are concerned with
strong growth. The elections of 2009 are still far away, but still
close for many politicians. The Ambassador responded that Indonesia
had been more successful in attracting portfolio investment than
long-term foreign direct investment (FDI).

Praise for U.S. Technical Assistance
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3. (SBU) Mulyani reiterated her appreciation of U.S. technical
assistance to her Ministry, including in the Directorate General of
Tax (DG Tax). She has also consulted with the Internal Revenue
Service and Treasury on ways to improve tax administration. "The
Ministry of Finance is very important and powerful," she noted, "but
needs deep reform." Many of these reforms were placed on hold after
the financial crisis, but now is the time to clean up our own house
internally. Tax and customs reform are her highest priority.

Budget Process in Transition
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4. (SBU) Mulyani noted that Indonesia's budget formulation process
is in an interesting state of transition. Under Soeharto, Indonesia
had a rubber stamp Parliament, now it is exercising real power. A
new draft law will define more formally the DPR's role. Many in the
executive branch are not used to this new dynamic, which is creating
some interesting debate. "We are still searching for the right
equilibrium," she noted. She also said that under the executive
branch, the budget process was still rather fragmented between the
National Planning Ministry (BAPPENAS),the other line ministries and
the Ministry of Finance.

Getting Out the Good News Stories
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5. (SBU) The Ambassador noted that he would be traveling to the U.S.
to discuss with Microsoft the possibility of holding its Global
Leadership Forum in Indonesia. "Indonesia needs to help tell its
story, otherwise there is gradual improvement but the world does not
notice." Mulyani concurred that at a recent Asia Pacific bankers'
dinner, many of the participants had never been to Indonesia before
and were pleasantly surprised at the positive developments, unlike
what the media has frequently portrayed. Indonesia needs to build
up its own confidence and put the blame game behind it, she said.
The Ambassador said that turning the page on some of the old cases
and disputes still unsettled from the financial crisis could improve
the perception of those outside the country and thus the overall the
investment climate.


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Embassy Land
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6. (SBU) On the issue of Embassy land, the Minister noted that from
the non-commercial aspects, all is clear. The political agencies
and City Planning Agency (DKI) have no problems. Under Indonesian
law, every transaction above Rp 100 billion ($11 million) requires
DPR approval. "I will have to defend the valuation in front of
Parliament," she noted. "The concern for my treasury is that my
balance sheet shows we were paid the same price or higher." She
said in her Ministry, Secretary General Mulia Nasution would be
coordinating the process with the Director General for Assets Mr.
Hadiyanto.

HUME