INDONESIA-CHINA CURRENCY SWAP VIEWED AS SIGN OF

C O N F I D E N T I A L JAKARTA 000542 FOR EAP/MTS, E, AND EEB/IFD NSC FOR J. BADER AND E. PHU TREASURY FOR M. NUGENT AND T. RAND SINGAPORE FOR S. BAKER E.O. 12958: DECL: 03/24/2019 TAGS: EFIN ECON ETRD EAID EINV ID SUBJECT: INDONESIA-CHINA CURRENCY SWAP VIEWED AS SIGN OF POSITIVE CHINESE ENGAGEMENT Classified By: AMBASSADOR CAMERON HUME for reasons 1.4 (b+d) ¶1. (C) Summary: Bank Indonesia and the People's Bank of China announced March 23 a bilateral currency swap arrangement worth an estimated equivalent of $15 billion (the actual deal is a rupiah-yuan swap). While the deal will offer limited utility to Bank Indonesia, an English- language editorial has already announced that it demonstrates a "partnership (that) could be developed into one of the most strategic alliances in the Asia-Pacific region." The Indonesian government will, however unfairly, contrast China,s engagement with the absence of a Federal Reserve currency swap line for Indonesia. End Summary. ¶2. (U) Bank Indonesia announced March 23 a bilateral currency swap with the People,s Bank of China for 100 billion yuan or 175 trillion rupiah (approximately $15 billion). The swap arrangement, which is outside the framework of the Chiang Mai initiative, has an effective period of three years, but can be extended by mutual agreement. Indonesian officials have hailed the deal as a measure that will help stabilize the currency. Bank Indonesia Governor Boediono publicly stated that the currency swap will reduce Indonesia's need to settle transactions with Chinese firms and banks with dollars. Anggito Abimanyu, Head of the Fiscal Policy Office at the Ministry of Finance, called the arrangement a "second line of defense" in safeguarding reserves. ¶3. (C) Bank Indonesia Deputy Governor Hartadi Sarwono told us privately that the deal will decrease pressure for U.S. dollars in Indonesian currency markets by allowing transactions with China to be settled in yuan. Hartadi said that the deal would promote bilateral trade and direct investment between the two countries. Indonesia has considerable trade and investment links with China, particularly for consumer goods and in the energy sector. For example, Chinese firms and banks are key to Indonesia,s plan to increase electricity generation by 10,000 megawatts. ¶4. (U) Market observers have mixed views on the utility of the deal because the yuan is not a convertible currency. Bank Danamon chief economist Anton Gunawan welcomed the development, saying it would add comfort and confidence to the market. Other analysts have said the benefits, while positive, should not be overstated. ¶5. (U) The currency swap is getting good press reviews. The March 24 editorial in the English-language daily The Jakarta Globe characterized the agreement as "crucial for Indonesia's efforts to diversify away from reliance on the United States and Western-based multilateral institutions, and represents further sign of China's growing economic clout." The Globe noted that China's long-term interest in securing energy resources and Indonesia's desire to secure long-term demand for its natural resources dovetail perfectly. It concluded that the agreement was "a good deal for Indonesia and for the people of Indonesia." ¶6. (C) While the practical benefits of this agreement may have been overplayed in the media, it reflects one more proactive step taken by the Indonesian government to improve views about its ability to minimize the effects of the economic crisis. China seems to be taking full advantage of an opportunity to assist Indonesia during a time of need. When trade and investment opportunities arise in the future, the arrangement may help Chinese interests seal the deal, notwithstanding historic Indonesian government caution about the costs of moving closer to its large neighbor. HUME