INDONESIAN MARKETS STRENGTHEN, DESPITE ELECTION SEASON

UNCLAS SECTION 01 OF 03 JAKARTA 000806

SENSITIVE
SIPDIS

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

SUBJECT: INDONESIAN MARKETS STRENGTHEN, DESPITE ELECTION SEASON
JOCKEYING


1. (SBU) Summary: While Indonesia remains vulnerable to changes in
global sentiment, markets here rallied strongly in recent weeks.
Improved global sentiment lifted equity markets throughout the
region; Indonesian markets benefited from positive current account
news, increased capital inflows, falling inflation and continued
monetary easing. Local markets gained added momentum after peaceful
legislative elections April 9 and the strong showing of President
Yudhoyono's Democratic Party. While coalition wrangling in advance
of July presidential elections caused markets to pull back briefly,
markets have rebounded strongly from 2009 lows registered on March

2. Since then, Indonesia's main equity index has risen by 46
percent, the rupiah has appreciated by more than 12 percent against
the U.S. dollar and yields on ten-year government bonds have fallen
by more than 200 basis points. Indonesia took advantage of an
improved environment to issue its first dollar-denominated sukuk
Islamic bond in the amount of $650 million on April 23, further
easing government financing pressures. Trade also improved in
March, with exports higher by more than 20 percent over February and
imports up by nearly 10 percent. Exports and imports remain more
than 30 percent lower in the first quarter of 2009 year-on-year.
End summary.

Markets Celebrate Democratic Party Legislative Gains,
Pull Back on Coalition Jockeying, Rally Again
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2. (U) The Indonesian stock market has surged 46 percent from its
2009 low, recorded March 2. The Jakarta Composite Index gained more
than 11 percent during the week of April 13 alone, following the
Democratic Party's strong showing in legislative elections. The
rupiah has also continued to strengthen, appreciating by over twelve
percent against the U.S. dollar since March 2, and over six percent
during the week of April 13 in a post-election bounce. Although
markets pulled back briefly after political jockeying over coalition
formation for July's presidential election heated up, equity and
currency markets have continued to strengthen, with the stock market
recovering to levels last seen in mid-September and the rupiah
reaching a six-month high against the U.S. dollar.

Indonesia's First U.S. Dollar Global Sukuk Bond Issuance Draws
Strong Demand and Further Eases Financing Pressure
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3. (U) Indonesia took advantage of improved market conditions to
hold its initial dollar-denominated global sukuk (Islamic bond)
offering. Demand was strong for the five-year $650 million
offering, which was oversubscribed by 7.3 times the amount of bonds
available. The bonds, issued April 23, were priced to yield 8.8
percent, significantly lower than the 10.5 percent required when
Indonesia issued five-year dollar-denominated notes in February.
Indonesia's sukuk issuance was reported to be the first
dollar-denominated sukuk since March 2008 and the largest since June

2007. Indonesia further diversified its sources of funding with the
issuance. The Finance Ministry reported the following investor
distribution for the offering: Middle East (30%); Indonesia (8%);
other Asia (32%); Europe (11%) and U.S. (19%).


4. (U) After front-loading bond issuances in early 2009, the
government of Indonesia has already reached about 80 percent of its
funding needs for the year. Plans remain on tap to proceed with a
JBIC-guaranteed, yen-denominated Samurai bond in the June timeframe.


Monetary Easing Continues, As Inflation Slows
More Quickly than Expected
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5. (U) Bank Indonesia (BI) has eased policy interest rates by 225
basis points since December, with its latest 25 basis point rate cut
to 7.25 percent on May 5. Some market analysts view BI as likely
nearing the end of its current cycle of monetary easing.
International reserves rose to USD 56.67 billion at end-April, up
from 54.8 billion at end-March (equivalent to 6.2 months of imports
and servicing of official external debt). In its monetary policy
statement, BI said improvements in the global economic outlook had
met with a positive response in global equity markets and a sharp
drop in the risk premium spread. This had encouraged resumption of
capital inflows to emerging markets, including Indonesia, resulting

JAKARTA 00000806 002 OF 003


in appreciation of the rupiah, gains in the Indonesian equity market
and improved government bond yields. BI noted the global economy is
expected to continue to shrink, albeit it at a slower rate.


6. (U) BI maintained its forecast for 2009 economic growth in
Indonesia of between 3 and 4 percent, supported by domestic demand
and improving export performance, and inflation at the lower end of
5-7 percent. It said national banking conditions remained sound,
with capital adequacy at 17.4 percent and non-performing loans below
five percent. Banking system liquidity, including liquidity in the
inter-bank money market, has eased with growth in depositor funds.



7. (U) Falling inflation has given BI additional room to cut policy
interest rates to spur domestic demand and growth. Consumer prices
fell more quickly than the market expected in April, helped both by
a stronger rupiah and a good harvest season. Month-on-month
deflation of 0.31 percent was driven by price declines in
unprocessed food
(-1.33 percent) and clothing (-1.70 percent). Headline consumer
prices fell to 7.31 percent year-on-year in April, down from 7.9
percent y-o-y in March. Core inflation fell to 7.14 percent.


8. (U) While BI rates have declined significantly, banks have
lowered lending rates only slightly, on continued credit quality
concerns, as non-performing loans climbed to 4.5 percent in March.
On April 17, BI revoked the license of a small commercial bank, IFI,
after the bank failed to increase its capital to above the minimum
capital adequacy ratio. The bank, which represented only 0.01
percent of domestic banking assets, was deemed not systemically
important and is being liquidated by LPS (the Deposit Insurance
Corporation).

Trade Decline Moderates On Commodity Export Pick-Up
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9. (U) Indonesia's March trade figures provided the first glimmer of
positive news on the trade front. Exports and imports both rose on
a monthly basis over February, with exports up nearly 21 percent and
imports up nearly 10 percent. The trade balance improved to a USD 2
billion surplus, including bounded trade zones. Exports rose to USD
8.54 billion, from USD 7.08 billion in February, as volumes
increased and prices improved for key commodities including coal and
crude palm oil. Rubber and rubber products and ores also registered
significant gains, but textiles, footwear, electrical machinery and
pearls and precious/semi-precious stone exports declined. Total
imports rose to USD 6.5 billion, from USD 5.9 billion in February.
According to preliminary figures from Statistics Indonesia, all
categories of imports increased in March over February, with
consumer goods up 31 percent; raw materials/intermediate goods up
7.4 percent; and capital goods up 11.8 percent. Despite these
monthly increases, for the first quarter 2009 as a whole, imports
remain sharply lower than first quarter 2008, down almost 36
percent. A sectoral breakdown for the period shows that consumer
goods declined by 33 percent; raw materials/
intermediates declined by 42 percent; and capital goods declined by
3 percent.


10. (U) Exports also remain well below 2008 levels, with first
quarter 2009 (January-March) exports down by over 32 percent y-o-y.
Oil and gas exports fell most sharply (down 55 percent, from USD 7.4
billion to USD 3.3 billion) during the first quarter of 2009 y-o-y,
followed by industrial exports (down 31.7 percent, from USD 22.4
billion to 15.3 billion). Agricultural exports rose slightly (up
almost one percent, to USD 968 million from USD 959 million) while
mining/other exports increased by nearly eleven percent (to USD 3.3
billion, from USD 3 billion).


11. (U) Indonesia's trade improved across trading partners in March.
Non-oil and gas exports rose to all major trading partners except
Australia. Non-oil and gas exports to the U.S. rose by less than
one percent (to USD 808.5 million),while exports to China increased
by over 51 percent (to USD 582.4 million),to the EU by almost 49
percent (to USD 1.2 billion),and to Japan by 22 percent (to USD
888.9 million). Non-oil and gas imports rose from most major
trading partners, including from the U.S., up by more than 8
percent, to USD 609.7 million; China, up by almost 38 percent, to
USD 1.05 billion; and Japan, up by almost 5 percent, to USD 698

JAKARTA 00000806 003 OF 003


million. Imports from ASEAN partners rose by over 7 percent, to USD
1.2 billion; imports from the EU fell by 2 percent, to USD 641
million.

Industrial Production: Some Early Signs of Improvement
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12. (U) The current global economic slowdown has weighed on
Indonesia's manufacturing sector. The Indonesian Employers
Association estimates that firms have dismissed 200,000-300,000
employees since January. Many were contract workers in the
manufacturing sector. Although industrial production declined in
the first quarter of 2009 (falling by 1.61 percent q-o-q),there are
some early signs of improvement as industrial production rose
slightly in both February (up 0.24 percent m-o-m; 0.89 percent
y-o-y) and March (0.77 percent m-o-m; 1.57 percent y-o-y),according
to Statistics Indonesia. The significant decline in raw material
imports indicates industrial production is unlikely to rebound
strongly soon, although rising industrial electricity consumption in
March points to a possible pick-up in production.

HUME