GOI Attempts to Calm Markets, But Indonesia Stock Exchange

UNCLAS SECTION 01 OF 02 JAKARTA 001897 SENSITIVE SIPDIS DEPARTMENT FOR EAP/MTS, EAP/EP, EEB/IFD/OMA TREASURY FOR M.NUGENT AND T.RAND COMMERCE FOR 4430 BERLINGUETTE/KELLY 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: GOI Attempts to Calm Markets, But Indonesia Stock Exchange Remains Closed REF: JAKARTA 1875 ¶1. (SBU) SUMMARY: Despite government efforts to calm markets by taking moves to increase liquidity and boost demand for stock shares, financial turmoil continues in Indonesia with fears about the impact of the real economy. The government announced on October 9 a series of actions aimed at calming markets with the stated intention of calming markets allowing for the reopening of the Indonesia Stock Exchange for trading on Friday, October 10. The earlier sell-off on Wall Street and the waves of selling which hit regional exchanges prompted authorities to cancel first the morning session and then later the afternoon session, ending a week which saw the Jakarta Composite Exchange fall more than 21%. Analysts have expressed concern that the closure of the exchange will leave a lasting, negative sentiment for investors, which may contribute to further currency weakness.END SUMMARY. STOCK EXCHANGE CANCELS PLANNED RESUMPTION OF TRADING, DESPITE GOI EFFORTS TO CALM MARKETS - - - - - - - - - - - - - - - - - - ¶2. (SBU) Finance Minister and Coordinating Minister of the Economy Sri Mulyani Indrawati returned to Indonesia from the Gulf to respond to the crisis, cancelling her planned participation in the IMF/World Bank meetings. On October 9, she announced a series of steps to calm markets, including relaxing mark-to-market accounting, easing regulations on share buy-backs by listed companies, increasing liquidity by accelerating government spending, funding the purchase of shares of state firms with strong fundamentals, and enforcement of capital markets regulation against market manipulators. Central Bank Senior Deputy Governor Miranda Goeltom announced a reduction in reserve requirements to 7.5%, to be implemented in a month, which will increase liquidity to the financial system. Goeltom also announced the government is considering an increase in bank deposits guarantee. ¶3. (SBU) Despite these aggressive moves to calm markets and heighten investor confidence, the wave of selling which hit other markets prior to the planned re-opening of the Indonesia Stock Exchange convinced Exchange authorities, in consultation with government officials, to cancel the planned October 10 re-opening of the stock exchange. The exchange remained closed all day on Friday. It has been closed since late morning on Wednesday, October 8. BUSINESS COMMUNITY LEADERS SHARE CONCERNS - - - - - - - - - - - - - - - - - - - - - ¶4. (SBU) Embassy spoke with both the chairman of the Indonesian Employers Association and the vice president of the Indonesian Chamber of Commerce and Industry (Kadin)for business community views of the current financial turmoil and the government's response. Both had the same basic message: the situation is difficult; everyone is doing what they can to eliminate the panic; but nobody knows the right answer. Both said that the government is consulting with a wide range of people (business and labor both) as they try to develop their responses. And both said that, in the longer term, there would be impacts on the real economy. ¶5. (SBU) The Kadin official hinted at considerable debate from within the business community regarding the role the government is playing. Some feel that the government's direct interventions in the market (specifically its role in suspending trading and changing stock buyback regulations) are legitimate - "if you're about to get killed you do everything you can to avoid it." Many others believe that it would be better not to intervene at all and just let the market correct. He said the panic involves not just foreign investors, but everyone, adding that in the current situation everyone is re-evaluating their risk vs. reward calculation. He also suggested that President Yudhoyono was playing a very large JAKARTA 00001897 002 OF 002 role in coordinating the government response, noting that he cannot afford to have his reputation damaged over his management of this situation. Neither official expressed any fear/concerns over social stability. RUPIAH WEAKENS, BOND YIELDS RISE - - - - - - - - - - - - - - - - - ¶6. (U) The rupiah by late afternoon had fallen another 0.3%, with an average rate of 9651/USD according to Bank Indonesia. The currency fell further in late trading, with Bloomberg reporting a rate of 9860/USD, a 1.13% loss. Domestic bond prices also fell, with yield on the ten-year bond rising to 14.624%. RUMORS CONTINUE TO SWIRL OVER FATE OF BAKRIE FIRMS - - - - - - - - - - - - - - - - - - - - - - - - - - ¶7. (SBU) Uncertainty continues to surround the fate of the six Bakrie group firms, owned by the family of State Minister for People's Welfare Aburizal Bakrie, which had been suspended after suffering large declines (reftel). Press reports cite a host of potential buyers of shares of Bakrie mining flagship PT Bumi Resources, including possibly two state-owned enterprises. A scheduled meeting between Bakrie firm representatives and stock exchange officials on October 10 was reported cancelled, due to the press of market conditions. The meeting was meant to clarify questions about the status of the firms, which had been suspended from trading on October 7. HUME