PRESIDENT YUDHOYONO IN POLITICAL TROUBLE DUE TO

C O N F I D E N T I A L SECTION 01 OF 04 JAKARTA 000684

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E.O. 12958: DECL: 04/04/2018
TAGS: PGOV EFIN ECON KDEM ID
SUBJECT: PRESIDENT YUDHOYONO IN POLITICAL TROUBLE DUE TO
HIGH COMMODITY PRICES

REF: A. JAKARTA 633

B. JAKARTA 579

C. JAKARTA 286

D. JAKARTA 204

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Classified By: Ambassador Cameron R. Hume, reasons 1.4(b+d).


1. (C) SUMMARY: High commodity prices and economic
pressures on the poor could jeopardize President Yudhoyono's
quest for a second term. Considered a virtual lock for
re-election as recently as a few months ago, SBY's
re-election bid may now hinge less on his ability to defeat
an undistinguished field of competitors than on his skill
navigating the growing popular backlash against high oil and
food prices. Upcoming gubernatorial elections in Java could
help gauge the explosiveness of the issue.


2. (C) SUMMARY (Con'd): In an effort to preserve his lead
in the polls, SBY has directed his administration to maintain
generous subsidies meant to alleviate economic pressure on
poor households. However, with higher commodity prices
driving the cost of these subsidies to more than a quarter of
the budget, this short-term remedy carries with it the
potential to undermine Indonesia's long-term economic
prospects. In the meantime, with the political season
beginning in earnest, long-term reform measures are stalled
with little prospect of moving forward soon. END SUMMARY.

NO LONGER UNASSAILABLE


3. (C) Until very recently, most observers viewed the
President as all but unassailable. After all, even the
latest available polling data suggests that President
Yudhoyono still retains an advantage over the likely field of
competitors for the 2009 race, with only former president
Megawati currently registering double digits in the polls.
The inevitability air surrounding President Yudhoyono's
candidacy has disappeared, however, in the face of increasing
evidence that rising food costs and attendant economic
problems have the potential to exact a high political cost.


4. (C) Overall food prices in Indonesia have increased by 12
percent in just one year, with prices for staple commodities
like flour and cooking oil both nearly doubling. These
increases have disproportionately impacted the poor and lower
middle class, key constituencies in Indonesia, and there is
ample anecdotal evidence that some of SBY's supporters are
becoming disillusioned with his inability to deliver on his
poverty reduction program. SBY's rivals clearly smell blood
and have honed in on the poverty issue, with one political
rival--General (ret'd) Wiranto--loudly claiming that the
poverty rate has reached 60 percent. In fact, while
Indonesia's official poverty rate is actually 16.6 percent
(income less than $1.55 a day),the World Bank estimates an
additional 32.4 percent of the population--over 75 million
people--are near poor (income $1.55-$2 a day).


5. (C) Such distinctions are lost on the average Indonesian,
however. The poor and near poor spend over one half of their
income on food, and they are painfully aware that they can
buy less food for their family today than possible a year

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ago. Conversations with dozens of ordinary people and
grassroots organizations clearly signal that large numbers of
poor Indonesians believe that they are living on the brink of
economic survival. Labor leaders have reported that the
working man does not factor democracy and basic rights into
his political thinking but rather just how he will pay the
bills. Regular protests against rising prices and media
coverage of how rising prices are hurting people contribute
to this perception. The feeling among many working class
Indonesians is that their economic security was more stable
under Suharto, regardless of whether that is true. Another
indication of the fragile household economy are the millions
of Indonesians migrating overseas annually, many knowing how
vulnerable they will be but left with no other choice.

WEST JAVA - THE POTENTIAL CANARY IN THE COAL MINE


6. (C) The April 13 election in West Java province could
well serve as a useful barometer of the political
explosiveness of the issue of rising prices (Ref A). West
Java's size (it is Indonesia's largest province with over 40
million people),recent history of mirroring national results
on the local level, and commercial strength all point to its
potential to serve as a bellwether. Nationally, in 2004,
President Yudhoyono captured 61 percent of the vote there,
compared with former President Megawati's 39 percent; West
Java was an almost perfect microcosm of the national results,
with 62.5 percent support for SBY, and 37.5 percent for
Megawati. The incumbent Governor, Danny Setiawan, has
received SBY's endorsement but is battling back a well-funded
challenger (an ally of former president Megawati's) who has
turned the commodity price issue into his rallying cry.


7. (C) Numerous political commentators who are watching the
race closely have confirmed that the commodity price issue
could decide the outcome. Many believe a loss for Setiawan
could serve as a harbinger of things to come for SBY next
year. Elections later this year in the equally large and
important provinces of Central Java (June 22) and East Java
(July 23) could also help gauge the political explosiveness
of this issue.

SBY STAYING THE COURSE


8. (C) According to Presidential Special Advisor T.B.
Silalahi, President Yudhoyono--while well aware of the
explosiveness of the poverty issue--was nevertheless
supremely confident that he would win re-election. Silalahi
said that Yudhoyono did not believe that Megawati, Wiranto,
ex-Jakarta Governor Sutiyoso, or any of the other potential
presidential candidates represented a significant threat.


9. (C) Silalahi reported that in light of the lack of
credible challengers, the president had concluded that he
could afford to tread political water for one more year and
avoid making any potentially risky policy maneuvers on the
reform side. According to Silalahi, SBY realized that he
would not be able to lower poverty in any appreciable way in
the one year remaining before the election anyway. The
strategy for re-election was simple, preserve the lead and
run out the clock.

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BAND AID MEASURES


10. (C) President Yudhoyono has publicly acknowledged that
oil and food prices will remain high and maintained that
Indonesia must adapt. He has also worked hard to appear
responsive to the impact economic forces are having on the
poor. In a March 26 speech to the Indonesian Employers'
Association, SBY outlined an economic growth strategy that he
called "pro-growth, pro-job, and pro-poor." In response to
higher food prices, SBY has also introduced a host of
remedial measures, including a reduction of import tariffs
and value added taxes, an increase in export taxes, and new
price subsidies aimed at easing the impact of higher prices
on the poor (Ref D).


11. (C) Slow implementation and unabated increases in global
food prices have rendered most of the administration's
policies ineffective, however. For example, the repeal of a
required instant noodle vitamin supplement--which provides 16
percent of the average Indonesian's iron intake--only saves
producers 0.27 cents per kilo. Even the removal of a 10
percent value added tax on wheat and a 10 percent tariff on
soybeans provides very limited price relief relative to the
rise in the global price of those commodities--90 percent and
40 percent, respectively--over the past year. Most analysts
expect the GOI to continue to focus on short-term poverty
alleviation programs such as increased price subsidies and
straight cash transfers to the poor.

SUBSIDY PAYMENTS: THE $25-30 BILLION LOST OPPORTUNITY


12. (SBU) GOI subsidies have softened the blow of higher oil
prices, but the cost of this policy is high. Fuel is now 40
percent below market price. The oil subsidy largely benefits
the rich as the richest 10 percent of the population receives
over 40 percent of the fuel subsidy benefit, according to the
World Bank. Oil and electricity subsidies in GOI budget
estimates are Rp 187 trillion ($21 billion),4.5 percent of
GDP. The IMF estimates the oil and electricity subsidy bill
to be Rp 217 trillion ($24 billion),or 5.0 percent of GDP.
Combined with food subsidies (Rp 47 trillion, $5 billion),
the subsidy bill totals $25-30 billion, or 25-30 percent of
the budget.


13. (C) Subsidies exceed development spending, estimated at
Rp 164 trillion ($18 billion),or 3.8 percent of GDP. The
GOI has already ordered a 15 percent cut to all ministry
budgets, including defense. A senior advisor to the Finance
Minister told us that the government may actually need to cut
ministry budgets by as much as 30 percent this year to pay
for the rising subsidy bill, a rate that will reduce
significantly basic government services.

ADDITIONAL THREATS


14. (C) A significant jump in poverty or macroeconomic
instability could force the government to raise interest
rates and cut spending on key services, a distinct
possibility in the absence of a sound policy response. Such
a scenario would likely create a popular backlash against the

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GOI and, by extension, imperil SBY's re-election prospects.
And higher interest rates would create a drag on economic
growth and, if they result in a higher exchange rate,
undercut Indonesia's international competitiveness. In
short, if the policy focus remains locked on the
short-term--which most analysts expect to be the case--the
winner of the presidential election will likely confront an
economic landscape with deteriorating government finances,
inflation, slower growth, massive infrastructure investment
needs, high unemployment levels, and an increased incidence
of poverty.

A GLOOMY OUTLOOK


15. (C) Based on our soundings, rising commodity prices and
a protracted global economic slowdown could jeopardize
President Yudhoyono's re-election bid. The Yudhoyono
administration's track record of strong growth and
macroeconomic stability has not translated into new jobs or a
meaningful reduction in poverty and SBY's base is feeling the
pinch. Despite the ominous signs of economic unease, the
paucity of credible presidential challengers seems to have
lulled SBY into a potentially false sense of political
security. Rather than craft a coherent strategy to address
pressures on government finances and poor houseQds,
President Yudhoyono has relied exclusively on short-term
policy tools to show activism and stop the bleeding. Not
only could this myopic approach potentially backfire and cost
him the election, but even if he does win, he may find that
he has secured a second term by signing a Faustian pact that
harms the country's mid-to long-term economic prospects.
HUME