Q3 GDP GROWTH OF 6.1% EXCEEDS EXPECTATIONS, BUT PROSPECTS

UNCLAS SECTION 01 OF 03 JAKARTA 002140 SENSITIVE SIPDIS DEPARTMENT FOR EAP/MTS, EAP/EP, EEB/IFD/OMA, E, EEB/ESC/IEC/ENR, EEB/IFD/ODF TREASURY FOR M.NUGENT AND T.RAND COMMERCE FOR 4430 BERLINGUETTE/KELLY ENERGY FOR PI-32/CUTLER AND GILLESPIE 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: Q3 GDP GROWTH OF 6.1% EXCEEDS EXPECTATIONS, BUT PROSPECTS FOR 2009 LOWERED AS VOLATILITY PERSISTS ¶1. (SBU) Summary: Indonesia's economy expanded at a higher than expected 6.1% (yoy) in the third quarter of 2008, on higher government spending, and continued strength in household consumption and investment. While the results boosted hope that 2008 growth may exceed 6%, most analysts have reduced 2009 growth forecasts to between 3 and 4 percent, well below current government projections. Indonesian currency and credit markets remain volatile, with the IDR particularly weak, fueling more concerns of further capital outflows. While the GOI advances efforts to secure alternative multilateral and bilateral financing to cover the 2009 budget deficit through a World Bank-led effort, President Yudhoyono continues to reject publicly any consideration of seeking IMF support. Financial market volatility appears to have prompted the hurried sale of mid-sized PT Bank Century Tbk, which experienced difficulties on November 13, to Bank Sinarmas. Meanwhile, a public presentation by Bakrie Group management on November 17 failed to boost confidence in its restructuring plans. The November 18 resumption of trading in two remaining Bakrie Group firms (Bakrie & Brothers and Energi Mega Persada),suspended since October 7, resulted in sharp losses and the triggering of automatic trading halts. End summary. Q3 GDP Results Stronger Than Expected, But Show Early Signs of Global Slowdown - - - - - - - - - - - - - - - - - - - - ¶2. (U) Q3 GDP growth of 6.1% yoy (3.5% qoq),was down from the second quarter's 6.4% yoy growth rate, but exceeded expectations of 5.9%. 2008 economic growth through the third quarter reached 6.3%, boosting hopes that the full-year result will exceed 6%. Third-quarter growth remained broad-based, prior to the seizing up of global credit markets in mid-September. Household consumption remained strong, rising 5.3% yoy (1.9% qoq); the pace of government spending accelerated, up 16.9% yoy (7.9% qoq); and investment remained in double digits, with growth of 12% yoy (5.4% qoq). Exports, which rose by 14.3% yoy, were flat from the previous quarter, reflecting plummeting export commodity prices. ¶3. (U) All major production categories contributed to positive economic growth on both a yoy and qoq basis. The transport and telecommunications sector rose 17.1% yoy (4.2% qoq); agriculture was up 2.4% yoy (6.7% qoq); construction rose by 7.5% yoy (3.1% qoq); mining production rose 1.6% (yoy and qoq); manufacturing increased 4.3% yoy (3.2% qoq); trade, hotel and restaurant sectors rose by 7.6% yoy (4.6% qoq); electricity, gas and water sector grew by 10.6% yoy (2.3% qoq); finance, real estate and company services rose by 8.5% yoy (1.8% qoq); and services grew by 6.7% yoy (0.9% qoq). On a geographic basis, Java contributed 57.5% to GDP, Sumatera 23.8%, Kalimantan 10.1%, Sulawesi 4.1% and remaining areas 4.5%. ¶4. (SBU) Most major analysts have recently reduced Indonesia's 2009 economic growth projections to 3 to 4%, as evidence mounts that the global slowdown and credit crunch are unlikely to turn around soon. Government officials are also tempering their growth forecasts, with Finance Minister Sri Mulyani Indrawati stating recently 2009 growth may reach only 5% and the chief of the Central Statistics Agency advising November 17 that 2009 growth will be below 6%. Volatility Continues in Financial Markets, With Banking Sector Showing Some Nervousness - - - - - - - - - - - - -- - - - - - - - - - ¶5. (SBU) Indonesian currency, credit and equity markets remain volatile. The IDR traded at more than 12,200/USD on November 18 and 19, but closed at 11,957/USD (BI mid-rate) on November 19. Bank Indonesia (BI) said strong demand for dollars from firms seeking to JAKARTA 00002140 002 OF 003 cover year-end needs had triggered further rupiah weakness. BI Governor Boediono said November 18 BI would not allow the market to drive the rupiah to "irrational" levels. It is unclear how BI intends to accomplish this. As BI has reduced somewhat its recent interventions in the currency markets after seeing a sharp decline in reserves, rupiah volatility has increased. Yields on the benchmark ten-year government bond have also risen to nearly 16.76% on November 19. The stock market has also continued to slide, with the Jakarta Composite Index down another 6.77% from November 17-19, and off its January highs by over 58%. ¶6. (SBU) Tight liquidity and market volatility appear to have prompted the hurried conclusion of a letter of intent to purchase 70% of the shares of PT Bank Century by PT Sinar Mas Multiartha Tbk on November 16. Bank Century had experienced what BI described as "technical" difficulties on November 13, when it failed to provide IDR 5 billion to BI's clearing system. While BI issued a statement on November 14 stating that Bank Century had provided the needed funds and was operating normally on November 14, and that the Indonesian banking system remained stable, it appears Bank Century was experiencing more than minor difficulties. BI has denied that it played any role in the sale of the bank. (Note: The IMF res rep told Embassy that the acquisition was not ideal, given that members of the Sinar Mas Group's Wijaya family had earlier been banned from banking in Indonesia as a result of the misuse of Bank Indonesia liquidity credits during the Asian financial crisis. End note.) ¶7. (U) Meanwhile, a PT Bahana Securities trader was detained November 16 on suspicion of spreading false rumors, reportedly after forwarding an e-mail which originated from Singapore which alleged runs were occurring on a number of Indonesian banks. The police are reportedly investigating a number of such cases. While Business Community Seeks Full Guarantee On Deposits and Other Steps To Help Cushion the Real Economy - - - - - - - - - ¶8. (SBU) The Yudhoyono administration continues to consider additional policy responses aimed at minimizing the impacts of the financial crisis on the real economy. As reports of industry layoffs and defaults by wholesale buyers of commodity and non-commodity shipments grow, the Indonesian business community has pressed the government to take additional steps to support the domestic market. One local business chamber leader told the Embassy that President Yudhoyono had pushed BI Governor Boediono to issue a "full" guarantee on banking deposits, in order to prevent capital flight and improve liquidity. (Note: the previous increase in bank deposit limits was authorized by presidential regulation and effected in a regulation issued by the Indonesia Deposit Insurance Corporation. End note.) Kadin, the Chamber of Commerce and Industry, has also continued to press for BI to begin reducing interest rates and to guarantee interbank lending. ¶9. (SBU) As additional signs of a slowdown in the domestic economy emerge, BI faces growing pressure to ease monetary policy and take further steps to improve liquidity. Its decision to maintain a 9.5% policy interest rate on November 6 has been portrayed by some local market observers as ultra-conservative, though most international analysts continue to focus on tighter monetary policy as BI's main tool to prevent a disorderly depreciation of the rupiah. Indonesia's recent imposition of regulations on foreign currency transactions on November 13 has failed to stem rupiah weakness or reduce volatility in local markets. JAKARTA 00002140 003 OF 003 Efforts to Secure Alternative Financing to Cover 2009 Budget Deficit Continue - - - - - - - - - - - - - - - - - - - ¶10. (SBU) The government has continued efforts to mobilize additional external financing to protect against possible continuation of the credit crunch into 2009, deemed by market analysts as essential for reassuring currency and credit markets. Sources have told Embassy that plans are advancing for a package of so-called "stand-by loans" valued at about $5.5 billion over two years, led by the World Bank, with bilateral lending support from Australia, Japan, France and China. The structure of the package would reportedly be as follows: Year 1 - World Bank ($1.4 billion), bilaterals (total of $1.4 billion); Year 2 - same breakdown. Other sources advise that the package is still a work in progress, with final decisions on bilateral participation still pending. Diplomatic sources also told Embassy that Japan intends to make an announcement at the upcoming East Asia Summmit about an assistance package for the region, including for Indonesia. Meanwhile, President Yudhoyono and other officials continue to reject publicly any consideration of seeking access to IMF financing, including its new Short-term Lending Facility. Bakrie Group Share Prices Continue to Slide, As Public Statement Fails To Reassure Markets - - - - - - - - - - - - - - - - - - - - - - - ¶11. (SBU) During a public presentation by Bakrie Group management on November 17, company officials failed to provide confidence to markets regarding its restructuring plan. Company officials admitted that the planned sale of a 35% share of Bumi Resources to Northstar Pacific Partners and Texas Pacific Group may face a price adjustment as some lenders holding pledged Bumi shares may have already sold the shares. Management also admitted that Bakrie & Bros. had defaulted on two repurchase agreements valued at IDR 134.9 billion (about USD $12 million). The November 18 resumption of trading in two remaining Bakrie Group firms (Bakrie & Brothers and Energi Mega Persada),suspended since October 7, resulted in sharp losses and the triggering of automatic trading halts. Bumi shares had briefly stabilized on November 14, following a November 13 announcement of a planned $700 million share buy-back. They have since resumed their slide, losing an additional 26% from November 17-19, bringing the decline in Bumi's share price to over 78% since September 22. HUME