IMF AND WORLD BANK CAUTIOUSLY OPTIMISTIC ABOUT INDONESIAN

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E.O. 12598: N/A
TAGS: EFIN EINV ECON EAGR ID
SUBJECT: IMF AND WORLD BANK CAUTIOUSLY OPTIMISTIC ABOUT INDONESIAN
ECONOMY


1. (SBU) Summary. The IMF resident representative and World Bank
country director are cautiously optimistic about Indonesia's ability
to manage the economic impact of the global financial crisis. In a
December 18 lunch hosted by Ambassador Hume, World Bank country
director Joachim von Amsberg and IMF resident representative Milan
Zavadjil cited Indonesia's strong economic team, sound macroeconomic
policies, healthy banking system, and large domestic economy as key
factors in Indonesia's ability to absorb the global downturn. They
warned, however, that the global crisis is likely to intensify in
2009, leading to increased unemployment in Indonesia and putting
additional stress on the banking and corporate sectors. Indonesia's
ability to deal quickly and effectively with emerging cases of
corporate or bank failure will be critical to maintaining investor
confidence, according to IMF Resident Representative Zavadjil. The
World Bank is considering significantly increasing its assistance to
Indonesia. End Summary.

Indonesia in Strong Position to Weather Crisis
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2. (SBU) Indonesia is in a stronger position than most emerging
market economies to deal with the impact of the global financial
crisis, according to von Amsberg and Zavadjil. Indonesia's economic
team, led by Coordinating Minister for the Economy Sir Mulyani
Indrawati, recognized the need to secure financing for the 2009
budget early on in the global financial crisis. Under Minister
Mulyani's leadership, Indonesia was one of a small number of
countries that sought budget support from the World Bank prior to
the onset of serious domestic economic distress. Indonesia also had
low public debt levels entering the crisis due to the fiscal
prudence of the economic team, giving it the flexibility to conduct
countercyclical fiscal policy.


3. (SBU) The representatives generally lauded the Government of
Indonesia's (GOI) macroeconomic response to the crisis, citing their
injection of liquidity into the banking system, decision to reduce
intervention in the foreign exchange markets as reserves began to
fall too rapidly, and measured approach to monetary easing. The
strength of Indonesia's large banks will also help support the
country as global demand for Indonesian products falls, according to
both institutions. Preliminary data for October 2008 indicate
steady and low nonperforming loan levels, strong net interest
margins and continued strong credit growth, according to Zavadjil.
The representatives also cited the large size of Indonesia's
domestic economy and the current robust level of domestic demand as
key factors softening the impact of flagging export growth.

Downside Risks to Test Government
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4. (SBU) Despite Indonesia's strong economic foundations, both
institutions expect the impact of the global financial crisis on the
Indonesian economy to intensify in the next six months. Zavadjil
noted that there is a significant shift in deposits from smaller to
larger banks, putting pressure on the small bank sector. Although
small bank failures are unlikely to cause an immediate systemic
banking collapse, he warned that the mishandling of bank failures
could spark a collapse in depositor confidence. Both
representatives also speculated that a series of corporate failures
involving well-connected Indonesians that the GOI fails to resolve
in a transparent manner would trigger another wave of international
investor retreat from Indonesia. Zavadjil also noted that the size
and trading volumes of Indonesian equity, bond and currency markets
have fallen significantly, allowing one or two large market players
to have a significant impact on prices.


5. (SBU) Both institutions expect growth to slow considerably in
2009, but neither envisions massive capital flight or a balance of
payments crisis. They noted that they personally believe that their
respective institutions' growth forecasts for 2009, 4.4% (World
Bank) and 5.5% (IMF),are overly optimistic. Their outlook for

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unemployment and wages in Indonesian has also deteriorated in recent
weeks, as global demand for Indonesian products continues to slump.
Recent press reports that neighboring countries are returning large
numbers of Indonesian workers will also exacerbate the unemployment
picture in 2009.

World Bank Evaluating Large Increase in Assistance
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6. (SBU) World Bank Country Director Joachim von Amsberg noted that
his institution is evaluating a significant increasing in its
assistance to Indonesia. The World Bank believes that its
assistance can make a major impact in Indonesia because of the
government's commitment to economic reform and the strategic
importance of the country. Indonesia is one of a small number of
countries that the bank is considering for the large increase in
funding.

HUME