INDONESIA - GROWTH SLOWS, BUT STILL FASTEST IN SOUTHEAST

UNCLAS SECTION 01 OF 03 JAKARTA 000882 SENSITIVE SIPDIS DEPARTMENT FOR EAP/MTS, EAP/EP, AND EEB/IFD/OMA SINGAPORE FOR S. BAKER TREASURY FOR M.NUGENT AND T.RAND COMMERCE FOR 4430 NADJMI DEPARTMENT PASS FEDERAL RESERVE SAN FRANCISCO FOR CURRAN E.O. 12958: N/A TAGS: ECON EFIN ETRD EINV ID SUBJECT: INDONESIA - GROWTH SLOWS, BUT STILL FASTEST IN SOUTHEAST ASIA, AND ECONOMIC TEAM CHANGES WELCOMED ¶1. (SBU) Summary: Indonesia's economy grew by 4.4 percent year-over-year (y-o-y) in the first quarter of 2009, the fastest in Southeast Asia. Growth came in slightly above market expectations, supported by strong domestic demand. While slower than the 5.2 percent y-o-y recorded during the previous quarter, Indonesia's continued resilience has prompted upward revisions in 2009 growth forecasts. Market observers welcomed President Yudhoyono's selection of Bank Indonesia (BI) Governor Boediono as his running mate as positive for investor sentiment and economic policy continuity. Market and political analysts also applauded parliament's May 12 confirmation of Darmin Nasution, Director General of Tax, Ministry of Finance, as new BI Senior Deputy Governor. End summary. Consumption and Government Expenditure Drive 1Q09 Growth - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ¶2. (U) In marked contrast with most other countries in the region, first quarter 2009 economic growth in Indonesia was positive on both a y-o-y basis (4.4 percent) and a quarter-over-quarter (q-o-q) basis (1.6 percent, not seasonally adjusted),according to Statistics Indonesia. Strong household consumption (up 5.8 percent y-o-y) and public spending (up 19.2 percent y-o-y) drove first-quarter growth. Gross fixed capital investment growth moderated (rising 3.5 percent),while exports of goods and services fell by 19.1 percent on continued weak global demand. On the production basis, first-quarter growth was strongest in the following sectors: transportation and communications (up 2.1 percent q-o-q; 16.7 percent y-o-y); agriculture (up 19.3 percent q-o-q; 4.8 percent y-o-y); electricity, gas and water (up 3.6 percent q-o-q; 11.4 percent y-o-y). Manufacturing, trade/hotels/and restaurants, construction and mining all registered quarterly declines, but all sectors experienced positive growth on a y-o-y basis. Revising 2009 Growth Forecasts on Positive Economic Data and Favorable Political Developments - - - - - - - - - - - - - - - - - - - - - ¶3. (SBU) Indonesia's economic growth outlook for 2009 has been subject to frequent revision. The International Monetary Fund (IMF) lowered its 2009 GDP growth forecast for Indonesia to 2.5 percent in April (though the IMF resident representative expects the IMF will raise its forecast following a mission visit in late May/early June.) The current World Bank and Asian Development Bank forecasts are for growth of 3.4 percent and 3.6 percent, respectively. Several market analysts have revised upwards their growth forecasts in recent days on positive economic data and favorable political developments. Although most revised projections remain slightly below the government's forecast of 4-4.5 percent growth, they are well above earlier forecasts of less than two percent. ¶4. (U) Markets welcomed Indonesia's positive balance of payments (nearly USD 4 billion) in first quarter 2009, on improved current and financial account results. According to BI, an increased surplus in the non-oil and gas trade balance (to USD 4.59 billion) and reduced deficits in the oil trade balance (to USD -155 million) and services (to USD -2.5 billion) account were key to a surplus in the current account (to USD 1.79 billion),which followed three consecutive quarters in deficit. BI noted that the rate of decline in the non-oil and gas exports had slowed on a month-on-month basis, on recovery of some export commodity prices and considerable demand for copper and coal from some Asian economies. Falling oil imports due to slowing economic growth and the ongoing conversion program to replace oil-based fuels with gas and coal improved the oil trade balance. In 1Q09, the financial account registered a surplus of USD 2.3 billion, a significant turnaround from a deficit of USD 4.1 billion in 4Q09. Higher investment in the oil and gas sector and acquisitions in the telecommunications sector bolstered the surplus in direct investment. Issuance of foreign currency government bonds was key to a portfolio investment surplus of USD 1.9 billion, a dramatic improvement from the portfolio investment deficit of USD 4.37 in 4Q08. ¶5. (SBU) Market analysts welcomed President Yudhoyono's May 15 announcement of BI Governor Boediono as his running mate in upcoming presidential elections as positive for investor sentiment, economic policy continuity and prospects for reform efforts. Market and JAKARTA 00000882 002 OF 003 political observers also applauded parliament's May 12 confirmation of Darmin Nasution, Ministry of Finance Director General of Tax, as BI Senior Deputy Governor to replace current Senior Deputy Governor Miranda Goeltom in late June. Nasution, a Sorbonne-educated Ph.D. in Economics, has received high marks for professionalism, personal integrity and supervision of reform of Indonesia's Tax Department. With Boediono's resignation as BI Governor, effective May 16, Goeltom is currently serving as Acting Governor. Consumer Confidence Remains High, Business Sector More Subdued - - - - - - - - - - - - - - - ¶6. (U) Indonesian consumer confidence remains high, shoring up domestic demand. Indonesian consumers had the highest confidence level in a recent Nielsen Global Consumer Confidence Index of fifty countries. Indonesia was only one of two countries whose consumers remained confident, despite the global slowdown, according to the Nielsen survey. Consumer confidence rose according to Bank Indonesia's April monthly Consumer Confidence survey, which showed sentiment moving to optimism (an index reading above 100) for the first time since November 2007. ¶7. (U) Views from the business sector for the economic outlook remain more subdued, as the business community continues to express frustration with continued high lending interest rates and slow implementation of the government's fiscal stimulus package. Indonesia's first quarter 2009 Business Tendency Index, which measures most recent economic developments based on a survey of 2,300 large and small firms, fell from the fourth quarter. Prospects for the second quarter of 2009 were also forecast to decline, although more slowly than in the first quarter. A lack of foreign orders expected in the second quarter weighed most on the manufacturing and trade/hotel/ restaurant sectors. Improved Domestic Bond Issuance Further Eases Government Funding Pressures - - - - - - - - - - - - - - - - - - - - - - ¶8. (SBU) A May 12 domestic bond auction attracted strong demand, further easing government funding pressures. The auction of four tranches (one-year notes, and reopened 7-, 15- and 30-year bond series) drew bids of more than IDR 14.7 trillion. The GOI issued IDR 5.375 trillion in bonds, well above the initial notional target of IDR 2 trillion. Seven-year bonds were most heavily bid, with the average yield on bonds issued at 11.19 percent, while one-year notes yielded 8.39 percent, fifteen-year bonds 12.29 percent and thirty-year bonds 12.59 percent. Foreign Direct Investment Picture Still Mixed - - - - - - - - - - - - - - - - - - - - - - - ¶9. (U) The Investment Coordinating Board of Indonesia (BKPM) recently lowered its investment growth forecast for 2009 to 9 percent, after April foreign direct investment (FDI) fell by 4.1 percent y-o-y to USD 1.4 billion. Domestic investment more than doubled on a y-o-y basis to USD 142 million in April, according to BKPM. Some firms continue to cancel or scale back investments in Indonesia. ArcelorMittal recently announced it would not move forward with potential multi-billion dollar investments in the steel sector, including a strategic investment in state-owned PT Anak Krakatau opposed by local stakeholders. Other firms are moving forward, however, with Volkswagen announcing an initial investment of USD $47 million in an assembly plant to supply the ASEAN market. Other large natural resource deals reportedly under negotiation include a USD 4.6 billion nickel project by French and Japanese investors, in partnership with a local firm. Labor Data Shows Improvement, But May Mask Higher Underemployment - - - - - - - - - - - - ¶10. (SBU) Although the most recent national labor data showed an improvement in unemployment, the results may mask higher underemployment resulting from a cutback in working hours in the formal sector. The business community here has told us that they have an agreement with the government to avoid large-scale layoffs JAKARTA 00000882 003 OF 003 through election season to prevent instability. According to Statistics Indonesia data released May 15, open unemployment declined in February 2009 to 8.14 percent, down from 8.46 percent in August 2008. The labor pool had increased by 1.79 million to 113.74 million during the period. The number of persons working at least 35 hours per week rose by 1.68 million and those working less than 35 hours per week increased by 250,000. The economic slowdown had taken a toll in the construction sector, where employment fell from 5.44 million to 4.61 million, and in the transportation, warehousing and communications sector, where employment fell from 6.18 million to 5.95 million. Employment in the agricultural and trade sectors -- areas which often absorb laid-off workers -- increased, with agricultural employment rising from 41.33 million to 43.03 million and trade-related employment increasing from 21.22 million to 21.84 million. HUME