BANK INDONESIA CUTS RATES AND GOI PRESSES FOR STIMULUS AS

UNCLAS SECTION 01 OF 03 JAKARTA 000264 SENSITIVE SIPDIS DEPARTMENT FOR EAP/MTS, EAP/EP, EEB/IFD/OMA, E, EEB/IFD/ODF TREASURY FOR M.NUGENT AND T.RAND COMMERCE FOR 4430 BERLINGUETTE/KELLY DEPARTMENT PASS FEDERAL RESERVE SAN FRANCISCO FOR CURRAN SINGAPORE FOR S. BAKER TOKYO FOR R. KAPROTH E.O. 12958: N/A TAGS: EFIN ECON ETRD EINV ID SUBJECT: BANK INDONESIA CUTS RATES AND GOI PRESSES FOR STIMULUS AS GROWTH PROSPECTS DIM ¶1. (SBU) Summary: As the global economic slowdown deepens, Indonesian authorities are pushing both expansionary monetary and fiscal policies to support domestic demand and maintain positive economic growth. With inflationary pressures subsiding, Bank Indonesia's (BI) February 4 decision to lower the overnight policy interest rate by 50 basis points to 8.25% was in line with expectations. The government continues to press for quick approval of a proposed IDR 71.3 trillion (USD 6.1 billion, or 1.4% of GDP) fiscal stimulus, but some legislators are pushing for further spending increases. To meet its financing requirements, the government has returned to capital markets and is finalizing multilateral and bilateral contingency financing. Meanwhile, Indonesian exports fell by more than 20% year-on-year in December, with intra-regional trade off particularly sharply. End summary. Easing Inflation Gives BI Scope to Cut - - - - - - - - - - - - - - - - - - - ¶2. (SBU) BI's latest rate cut, the third in three months, came after the Consumer Price Index fell more than expected, to 9.17% y-o-y in January. Deflation of 0.07% in January was largely due to recent government cuts in administered prices (subsidized fuels, electricity and transportation),rather than from across the board price declines. The transportation, communications and financial services category declined by 2.53% m-o-m, while the housing, water, electricity, gas and fuel category fell by 0.06% m-o-m. Food prices rose, however, with raw food up 0.76% m-o-m and prepared food up 0.98% m-o-m. Core inflation rose by 7.39% y-o-y, 0.44% m-o-m. BI officials said they see further room to lower rates if inflation continues to fall. The IMF res rep told Embassy on February 5 that expectations for inflation to slow to 5-6% by August are reasonable. Trade and Growth Prospects Deteriorate - - - - - - - - - - - - - - - - - - - - ¶3. (U) As evidence of a deeper global economic downturn has accumulated, growth revisions are continuing to be revised downward. The government reduced its 2009 growth forecast to 4.7%, while the IMF lowered its forecast to 3.5%. BI's monetary policy statement acknowledged that the global economic slowdown was bearing down with increasing severity on Indonesia's tradables sector, but said performance of the non-tradables sector remained relatively stable. BI also reported signs of weaker growth, with bank lending and monetary aggregates moderating from high levels in the second half of 2008. ¶4. (U) Economic weakness was also visible in sharply lower trade numbers and falling industrial production. Indonesia's exports fell 20.56% y-o-y in December, and 9.57% m-o-m to USD 8.69 billion (vs. November's decline of 2.3% y-o-y and 11.09% m-o-m). Trade Minister Pangestu subsequently lowered the forecast for 2009 export growth to between 1 and 2.5%. Exports of key commodities, including CPO and rubber, as well as manufactured goods such as mechanical appliances, all dropped by more than 20% m-o-m. Apparel exports registered double-digit growth, while ores, slag and ash exports rose by 72%. Indonesian imports fell by slightly more than USD one billion (11.67 %) to USD 7.7 billion in December. While oil and gas imports fell by nearly 25% (to USD 983.3 million) for the month, non-oil and gas imports declined by 9.38% m-o-m to USD 6.7 billion. Industrial production also fell by 3.4% in the fourth quarter (q-o-q). The gloomy December trade stood in stark contrast with the 19.86% increase in exports (to USD 136.76 billion) for 2008, driven by record commodity prices earlier in the year. The trade surplus for 2008 narrowed to USD 8 billion (down from USD 40 billion in 2007). ¶5. (U) Indonesia's trade with its Asian trading partners fell most sharply in December, giving little support to the hope that increased intra-Asian trade would offset falling trade with developed countries. By sector, consumer goods and raw materials/intermediate goods both fell (from 6.91% to 6.48% and from JAKARTA 00000264 002 OF 003 73.02% to 65.03% respectively),while capital goods as a share of total imports rose from 20.07% to 28.49%, driven by an increase in imports of aircraft to USD 769.9 million. See Tables A and B below for more detailed breakdowns of December trade data. Rupiah Weakens, Reserve Assets Fall Slightly - - - - - - - - - - - - - - - - - - - - - - - ¶6. (U) The rupiah has depreciated about 8% against the USD in 2009, slipping to IDR 11,800/USD. BI has reportedly been intervening to prevent the rupiah from exceeding IDR 12,000/USD. BI reported reserve assets fell to USD 50.9 billion as of end-January (from USD 51.639 billion end-December),equivalent to 5.2 months' of imports and government foreign debt payments. GOI Pushing Fiscal Stimulus, Securing Financing - - - - - - - - - - - - - - - - - - - - - - - - ¶7. (U) The Indonesian government is pushing hard for passage of its proposed expanded fiscal stimulus package of IDR 71.3 trillion (about 1.4% of GDP). If approved, the stimulus package would increase the planned 2009 budget deficit to 2.5% of GDP. The current stimulus proposal includes an estimated IDR 56 trillion in tax savings (including cuts in marginal income tax rates effective January 1 as a result of revision of the Income Tax Law),tariff cuts and subsidies. It also contains a relatively small new expenditure component, including an additional IDR 10.2 trillion for new infrastructure projects. Some members of the legislative committees considering the proposal are pushing for even higher spending. ¶8. (SBU) Authorities remain busy lining up financing for the proposed IDR 132 trillion deficit. Acting Coordinator Minister for Economic Affairs and Finance Minister Sri Mulyani Indrawati said that the government had received assurances from multilateral and bilateral partners on contingency financing of USD 5-6 billion. The World Bank Executive Board is scheduled to consider a contingency financing proposal for Indonesia (Development Policy Loan with Deferred Drawdown Option) in early March. Embassy understands Japan is also poised to announce participation in the World Bank-led contingency financing effort, additional official development assistance of about USD 1 billion to Indonesia and an increase in funds available under the Chiang Mai Initiative. ¶9. (U) The government held two successful domestic bond issuances in January (raising USD 823.5 million),concluded a private placement of debt valued at IDR 500 billion (about USD 42.9 million),and is carrying out a retail sukuk (Islamic bond) offering through February ¶26. Given strong demand, the government has doubled the target for the three-year, 12% coupon bond issuance (to IDR 3.4 trillion, about USD 290.6 million). The government has also wrapped up a road show to assess investor interest in a USD 3 to 4 billion medium-term government note program. TABLE A -------------- Key trade results for Indonesia, December 2008: EXPORTS USD millions change m-o-m Fats/vegetable oils 835.6 -31.4% Mechanical appliances 393 -20.3% Rubber, rubber articles 340.2 -21.7% Electrical machinery 621.6 -12.8% Ores, slag and ash 457.5 72% Apparel, not knitted 305.7 22.6% Apparel, knitted 251.1 26.0% IMPORTS Vehicles 290.3 -43.3% Mechanical appliances 1267.3 -12.5% Iron and steel 384.3 -23.6% JAKARTA 00000264 003 OF 003 Electrical machinery 915.2 -10.7% Organic chemicals 197.9 -27% Fertilizer 166.5 -29.8% Plastic, plastic articles 191.2 -24.4% TABLE B -------------- Indonesian non-oil and gas trade, by major trading partner: EXPORTS USD millions change m-o-m Japan 1,007.3 -11.1% Malaysia 350.8 -22.8% China 456.1 -14.3% Thailand 162.9 -28.2% Australia 134.5 -27.4% Singapore 706.7 -2.7% U.S. 907.0 -3.0% Taiwan 254.2 15.1% South Korea 329.4 3.8% EU 1,249.7 1.2% IMPORTS Japan 1,017.7 -17.2% Malaysia 280.0 13.2% China 871.5 -28.5% Thailand 341.8 -40.9% Australia 290.2 -3.0% Singapore 702.5 -12.9% U.S. 541.1 4.9% Taiwan 139.2 -19.1% South Korea 259.0 -26.3% EU 1,094.7 54.1% (Statistics Indonesia) HUME