Cablegate: Bank Indonesia Briefs Under Secretary Jeffery On Economy,

VZCZCXRO9818
RR RUEHCHI RUEHDT RUEHHM
DE RUEHJA #2609/01 2610002
ZNR UUUUU ZZH
R 180002Z SEP 07
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 6303
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHKO/AMEMBASSY TOKYO 0807
RUEHBJ/AMEMBASSY BEIJING 4316
RUEHBY/AMEMBASSY CANBERRA 1186
RUEHUL/AMEMBASSY SEOUL 4196
RUEAIIA/CIA WASHDC

UNCLAS SECTION 01 OF 02 JAKARTA 002609

SIPDIS

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SENSITIVE

DEPT FOR EAP/MTS AND EB/IFD/OMA
TREASURY FOR IA-SETH SEARLS AND JWEEKS
SINGAPORE FOR SBAKER
TOKYO FOR MGREWE
COMMERCE FOR 4430/BERLINGUETTE
DEPARTMENT PASS FEDERAL RESERVE SAN FRANCISCO FOR TCURRAN
DEPARTMENT PASS EXIM BANK

E.O. 12598: N/A
TAGS: EFIN EINV ECON PGOV ID
SUBJECT: BANK INDONESIA BRIEFS UNDER SECRETARY JEFFERY ON ECONOMY,
BANKING SECTOR

1. (SBU) Summary. Two Bank Indonesia (BI) Deputy Governors briefed
visiting Under Secretary Jeffery on Indonesia's macroeconomic
success in recent years; BI's effort to improve the formal
arrangement for managing economic and financial crises; and the
central bank's work to prevent large-scale crises from occurring in
the future. BI officials also requested additional technical
assistance and training from U.S supervisory authorities. Under
Secretary Jeffery congratulated BI on its significant progress in

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improving the soundness of the financial sector and promoting
macroeconomic stability in Indonesia. End Summary.

BI Officials Detail Success, Challenges
---------------------------------------

2. (SBU) Deputy Governor for Internal Finance and Central Banking
Studies Bun Bunan E.J. Hutapea provided an overview of Indonesia's
macroeconomic success in recent years. He noted that the Indonesian
economy has finally returned to growth levels experienced prior to
the 1997-98 crisis. He enumerated Indonesia's significant successes
in maintaining macroeconomic stability over the past two years.
Inflation continues to decline, economic growth during the first
half of the year rose to 6.1%, foreign exchange reserves stand at
$51 billion, or 5.1 months of imports, the banking sector is strong
and the Indonesian financial sector has largely weathered the
current volatility in global financial markets. On the expenditure
side, strong commodity exports and growing domestic consumption have
supported strong GDP growth. On the production side, more robust
growth in manufacturing and services have supported strong economic
expansion. BI expects strong growth to continue through the
remainder of 2007 and into 2008.

3. (SBU) BI officials also pointed to Indonesia declining external
debt levels, fiscal consolidation and debt swap agreements with
other Asian countries as signs of a more stable macroeconomic
infrastructure. The GOI has successfully consolidated its fiscal
position through the elimination of fuel prices subsidies in 2005,
and has maintained a fiscal deficit close to 1% of GDP since that
time. As a result, both the size and composition of Indonesia's
public debt-to-GDP ratio have improved, allowing the government to
repay its obligation to the IMF in the spring of 2007, ahead of
schedule. BI officials also noted that Indonesia has entered into a
$12 billion swap arrangement with Japan, Korea and China to provide
liquidity in the event of financial instability. (Note: The Under
Secretary pointed out that, given the interconnected nature of

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global financial markets, these arrangements may prove to be of
limited use if all parties call on the funds at the same time. End
note.)

4. (SBU) Deputy Governor Banking Policy and Financial System
Stability Muliaman D. Hadad described BI's effort to improve the
formal arrangement for managing economic and financial crises and
the central bank's effort to prevent large-scale crises from
occurring in the future. On crisis management, BI has worked
closely with the Ministry of Finance and other relevant GOI agencies
to delineate clearly the responsibility of each body in the event of
a crisis. This work has included singing an MOU between BI and the
GOI to provide legal standing to these arrangements and the
formation of a financial stability forum, which meets regularly at
both senior- and working-levels. BI officials report that this
apparatus functioned well during the recent global market
instability.

5. (SBU) On crisis prevention, BI has focused on building strong
banking institutions and financial system integrity as well as
developing an early warning system to signal impending financial
sector vulnerabilities. According to Deputy Governor Hadad, the
1997-98 crisis revealed governance weaknesses across Indonesia's
financial institutions, particularly around related party lending.
As a result, BI has focused on improving the risk management and
governance capacity of Indonesian banking institutions. BI also is
in the process of improving the competitive environment in the
Indonesian banking sector. Indonesia's banking sector is highly
concentrated, with the 10 largest institutions accounting for the
majority of banking sector assets. At the same time, Indonesia has
a large number of very small, unsophisticated banking institutions

JAKARTA 00002609 002 OF 002

with limited risk management capacity. According to Hadad, BI's
banking architecture reforms are focused on improving competition
among large players while consolidating Indonesia's smaller and
weaker institutions.

6. (U) In an effort to develop Indonesia's financial sector
infrastructure, BI is promoting the creation of a domestic
debt-rating agency. BI officials also stated that BI is considering
undergoing an International Monetary Fund Financial Sector
Assessment Program to develop a blueprint for strengthening and
deepening the financial sector. Finally, BI is working to improve
the financial education of depositors and investors in an effort to
empower the Indonesian population. BI is in the process of
developing a dispute settlement mechanism to respond to consumer
complaints as well as a mediation process that can resolve these
consumer disputes outside of the court system.

BI Seeks U.S. Assistance to Build Supervisory Capacity
--------------------------------------------- --------

7. (U) BI thanked the United States for providing training for its
supervisory staff in the post-crisis years. The Federal Deposit
Insurance Corporation, the Federal Reserve Bank of New York, and the
Board of Governors of the Federal Reserve System have provided BI
staff with significant training in risk-focused supervision.
However, in an effort to achieve central bank's goal of improving
the expertise of supervisory staff, Hadad requested additional
assistance from the supervisory authorities in the United States.
Deputy Governor Hadad believes Indonesia needs to accelerate
supervisory training and reforms in light of ongoing innovation in
the financial sector, the need to adopt international accounting
standards, and the need to prepare for the introduction of Basel II
capital standards.

Under Secretary Applauds BI on Bank Reform, Stability
--------------------------------------------- --------

8. (U) Under Secretary Jeffery congratulated BI on its significant
progress in improving the soundness of the financial sector and
promoting macroeconomic stability in Indonesia. The Under Secretary
pointed to the high quality of BI's staff, the central bank's newly
won independence and the strength of BI's regulatory approach as
very positive developments. BI officials were particularly
interested in the Under Secretary's views on the recent difficulties
in the subprime mortgage market in the United States and the U.S.
view on the seriousness of the climate change issue.

9. (U) U/S Jeffery cleared on this cable.

HUME

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