INDONESIAN AUTHORITIES CONFIDENT, BUT NOT COMPLACENT,

UNCLAS SECTION 01 OF 02 JAKARTA 001026

SENSITIVE
SIPDIS

DEPARTMENT FOR EAP/MTS, EAP/EP, AND EEB/IFD/OMA
SINGAPORE FOR S. BAKER
TREASURY FOR M.NUGENT AND T.RAND
USTR FOR EHLERS
COMMERCE FOR 4430 NADJMI
DEPARTMENT PASS FEDERAL RESERVE SAN FRANCISCO FOR CURRAN

E.O. 12958: N/A
TAGS: EFIN ECON ETRD EINV ID

SUBJECT: INDONESIAN AUTHORITIES CONFIDENT, BUT NOT COMPLACENT,
ABOUT CURRENT ECONOMIC CONDITIONS


1. (SBU) Summary: Indonesian economic policymakers appear
confident, relishing the wave of positive attention the country has
received in recent weeks. The recent upward revision by the IMF of
its 2009 growth forecast for Indonesia and an improvement in the
outlook for its sovereign rating by Moody's are the latest
recognition of the economy's current resilience (septel).
Authorities are not complacent, however, about challenges still
posed by the "global financial tsunami." While Finance Minister Sri
Mulyani Indrawati said at a June 13 conference that she expected the
Indonesian economy to grow by at least four percent in 2009 and by
up to six percent in 2010, she also called for continued
international cooperation to support recovery of the still fragile
global economy. End summary.

FINANCE MINISTER: "NO COMPLACENCY AT ALL"


2. (U) Finance Minister Sri Mulyani Indrawati told an international
audience of central bankers, regulators and private-sector financial
actors that she welcomed recent improving global economic
conditions, but had "no complacency at all" that the global economic
downturn was drawing to an end. Regarding Indonesia's relative
economic resilience, Indrawati said Indonesia's assertive domestic
policy response and active economic diplomacy had restored
confidence and credibility -- "the most valuable asset" -- following
the disruption of financial markets last fall. Indrawati delivered
her remarks on June 13 at Bank Indonesia's (BI) annual international
seminar focused on "Global Financial Tsunami: What Can We Do?"


3. (U) The minister echoed calls she has made previously for a
coordinated response to the crisis: the need for collective
counter-cyclical measures; the need for the right balance between
market regulation and dynamism and innovation (and recognition of
the likelihood of an overreaction in regulatory approach, which may
delay eventual recovery); and the need for multilateral development
banks (MDBs) and international financial institutions (IFIs) to
provide additional resources to developing and emerging economies
hit by the crisis. She also highlighted her continued focus on
improving governance and accelerating budget expenditure -
particularly for priority infrastructure investments key to
increasing longer-term growth.

KUDOS TO JAPAN, BRICKBATS FOR CREDIT RATING AGENCIES


4. (SBU) Indrawati praised "the outstanding efforts" of the
government of Japan in both the G20 and in ASEAN + 3 to assist
countries in the region in responding to the crisis. She then
delivered a scathing critique of credit rating agencies and their
failures and the need for closer monitoring and increased
transparency. After excoriating the agencies for having not raised
Indonesia's sub-investment grade sovereign rating, Indrawati
challenged them to come to Jakarta to her office to learn how
Indonesia had changed in the past decade.


5. (SBU) The minister's most interesting observations came during
occasional detours from her prepared remarks and in the question and
answer period which followed. These remarks were a mix of
philosophical musings, vents of frustration likely triggered by the
current presidential political campaign which has featured ceaseless
attacks on the administration's economic record, and cautions about
potential economic challenges down the road. Indrawati riffed on
the gulf between a global economic crisis and sovereign-based
economic policymaking and on the trade-off between good governance
and development goals when "everyone wants to provide a check and
there is no balance". She cited the need to manage a democratic
government's inefficient decision-making process, while trying to
accelerate implementation of the government's fiscal stimulus, and
noted the Indonesian public's current obsession against government
debt financing and the yearning by some for "benevolent
authoritarianism". She also cautioned about the risks to recovery
of a possible surge in commodity prices.

BI: LOOKING AT STICKY LENDING RATES, FUTURE FINANCIAL SUPERVISORY
STRUCTURE


6. (U) BI officials, including Acting Governor Miranda Goeltom and
Director of Banking Regulation and Research Halim Alamsyah, focused

JAKARTA 00001026 002 OF 002


on the importance of long-term financial stability, the health of
the banking sector and the future structure of Indonesian financial
supervisory functions. Goeltom said changes in financial system
behavior had increased the complexity of monetary policy in
Indonesia, bolstering the need for policy flexibility. She
highlighted the intensification of the role played by risk
perception both in the dynamics of Indonesia's financial account and
in the very slow response of the banking sector to transmit
reductions in the BI policy interest rate to lower bank lending
rates. While BI had lowered the policy rate 225 basis points from
December 2008 to May 2009, bank lending rates had fallen only 65
basis points and deposit rates by 108 basis points.


7. (U) Alamsyah described the Indonesian banking sector as stable,
liquid, well capitalized (with a capital asset ratio of 17.6 percent
as of April 2009) and very profitable, but not very efficient.
Credit risk was, in his view, manageable and banks are well
provisioned against slightly rising non-performing loans. Alamsyah
said supervisory function challenges included continued information
gaps among financial supervisors, regulatory arbitrage among
markets, the need to strengthen prudential enforcement, the need to
provide greater financial inclusion and the need for a clearer
mandate for Indonesia's Crisis Management Protocol, which remains
based on a Memorandum of Understanding.


8. (U) The seminar also included a brief discussion of plans to
split BI's monetary policy and financial supervision by establishing
a Financial Services Authority (OJK) by no later than 2010, as
provided by the Banking Act of 1999, as amended, to regulate
financial institutions. Given Indonesia's current banking
structure, in which banks are only lightly conglomerated, some
participants favored BI retaining intensive supervision of core
banks, while arguing non-core financial institutions should receive
less intrusive supervision but be subject to strong disclosure
requirements.

PRIVATE SECTOR: A (MOSTLY) UPBEAT OUTLOOK ON INDONESIA


9. (U) Compared to the sober assessments of the global outlook by
IFI and MDB officials and the truly gloomy views on global
conditions and crisis response from various academic participants,
private-sector bankers and investors participating in the BI seminar
held generally positive assessments of prospects for the Indonesian
economy. Simon Morris, CEO, Standard Chartered Indonesia, was
upbeat, projecting GDP growth of four percent for Indonesia in 2009.
Morris argued that while the West had experienced systemic failure
and collapse, Asia was facing a cyclical challenge. Asian banks
were better prepared to withstand recent financial market turmoil as
a result of reforms made following the Asian financial crisis, had
been less leveraged than their Western counterparts and were less
exposed to toxic assets.


10. (U) Gita Wirjawan, founder of private-equity firm PT Ancora
International and a former investment banker, said he shared a
pretty positive view of the Indonesian economy given sound fiscal
policy and good budget management. He expects BI to reduce the
policy interest rate to six percent by end-2009, a forecast
considerably lower than most market analysts. Wirjawan said
stabilization of some commodity prices had driven the recent equity
market rally, but warned against overconfidence about the amount of
capital that will be available to Indonesia going forward, given
current and future U.S. financing needs.

NORTH