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