JAPAN ANNOUNCES LARGE ASSISTANCE PACKAGE FOR INDONESIA

UNCLAS JAKARTA 000311 SIPDIS SENSITIVE DEPT FOR EAP/MTS, EAP/EP, EEB/IFD/OMA TREASURY FOR IA/TRINA RAND AND LOIS QUINN NSC FOR E. PHU DEPT PASS FEDERAL RESERVE SAN FRANCISCO FOR CURRAN SINGAPORE FOR S. BAKER TOKYO FOR R. KAPROTH E.O. 12598: N/A TAGS: EFIN ECON EAID EINV ID SUBJECT: JAPAN ANNOUNCES LARGE ASSISTANCE PACKAGE FOR INDONESIA REF: A) 08 Singapore 947 B) Jakarta 264 C) Jakarta 227 ¶1. (SBU) Japan agreed to guarantee Indonesian yen-denominated government bonds and doubled its bilateral currency swap agreement with Indonesia on February 21 on the margins of the ASEAN Plus Three Finance Ministers meeting in Phuket, Thailand. The state-backed Japan Bank for International Cooperation (JBIC) has agreed to guarantee up to $1.5 billion in Government of Indonesia (GOI) Samurai Bonds (yen-denominated bonds issued in Tokyo) as part of a broader, World Bank-led contingent financing package. The World Bank package provides budget support if the GOI is unable to raise funds in financial markets at reasonable rates. If the JBIC-guaranteed bonds are unsuccessful, JBIC will provide up to $1.5 billion in direct loans to the GOI, according to World Bank staff and Japanese Ministry of Finance staff in Singapore. Japan also increased its bilateral currency swap agreement under the Chiang Mai Initiative (CMI) with Indonesia from $6 billion to $12 billion to assist in meeting potential short-term balance of payments difficulties. In addition to Japan, Indonesia has a $4 billion bilateral currency swap agreement under CMI with China and a $2 billion bilateral currency swap under CMI with Korea, according Bank Indonesia officials. (Note: Under the CMI, Indonesia can only access 20 percent of these swaps without participating in an IMF program. End note (Ref A).) ¶2. (SBU) President Susilo Bambang Yudhoyono and Foreign Minister Hassan Wirajuda requested two forms of bilateral support from the United States during their recent meetings with Secretary Clinton. First, Indonesia requested a bilateral currency swap. (Note: In the US, the Board of the Federal Reserve independently decides to extend bilateral currency swaps. End note.) Second, the GOI reiterated its request made in a letter to Treasury Secretary Paulson in 2008 that the USG participate as a bilateral donor to supplement the World Bank-led contingency financing package. On January 13, the Treasury Department replied that the USG would not be able to contribute bilateral resources to supplement the multilateral facility at that time. However, the Treasury Department advised the USG would consider supporting the use of its multilateral resources through the World Bank package when it went to the World Bank Executive Board. (Note: The World Bank Executive Board will consider the Public Expenditure Support Facility Development Policy Loan with Deferred Drawdown Option on March 3, according to the current schedule. End note.) ¶3. (SBU) Indonesia's economic outlook continues to deteriorate and the IDR remains vulnerable to capital flight. Economic growth in the fourth quarter of 2008 was healthy, at 5.2% year-on-year (yoy), but significantly below market and GOI expectations of 5.7% (yoy). With slumping exports and ebbing domestic demand, most forecasters expect GDP growth to slow below 4% in 2009 (Ref B). Analysts also warn that rising non-performing loans in the banking sector and a contraction in the supply of foreign currency lending may undermine confidence in Indonesia's economic resilience, putting pressure on the currency and government bond yields (Ref C). ¶4. (SBU) Signs of fiscal and balance of payments stress increased in February. The IDR has depreciated 2.5% since the beginning of February and 28.5% over the past six months. The yield on ten-year GOI bonds rose to 13.94% on February 20, up 215 basis points since February 2. Despite this pressure, Indonesia continues to eschew requesting IMF assistance, including the IMF's Short-term Lending Facility, due lingering distrust of the IMF from the 1997-98 financial crisis and worries about political fallout during the upcoming election year. HUME