VZCZCXRO9763
RR RUEHCHI RUEHCN RUEHDT RUEHHM
DE RUEHJA #2092/01 3180951
ZNR UUUUU ZZH
R 130951Z NOV 08
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 0627
RUEATRS/DEPT OF TREASURY WASHINGTON DC
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC
RUEHKO/AMEMBASSY TOKYO 2717
RUEHBJ/AMEMBASSY BEIJING 5605
RUEHBY/AMEMBASSY CANBERRA 3276
RUEHUL/AMEMBASSY SEOUL 5119
RUEHGP/AMEMBASSY SINGAPORE 6379
RUEAIIA/CIA WASHDC
UNCLAS SECTION 01 OF 03 JAKARTA 002092
SIPDIS
SENSITIVE
DEPT FOR EAP/MTS, EAP/EP AND EEB/IFD/OMA
TREASURY FOR IA/MALACHY NUGENT AND TRINA RAND
COMMERCE FOR 4430/KELLY
DEPT PASS FEDERAL RESERVE SAN FRANCISCO FOR CURRAN
DEPARTMENT PASS EXIM BANK
SINGAPORE FOR SBAKER
TOKYO FOR MGREWE
USDA/FAS/OA YOST, MILLER, JACKSON
USDA/FAS/OCRA CRIKER, HIGGISTON, RADLER
USDA/FAS/OGA CHAUDRY, DWYER
DEPT PASS USTR WEISEL, EHLERS
E.O. 12598: N/A
TAGS: EFIN EINV ECON EAGR ID
SUBJECT: INDONESIA IMPOSES CONTROLS ON FOREIGN EXCHANGE
TRANSACTIONS
1. (SBU) Summary. Bank Indonesia (BI) announced measures to regulate
foreign exchange purchases on November 12 in an effort to shore up
the weakening Rupiah (IDR). The new rules require individuals and
firms to provide documentation about the underlying transaction for
foreign exchange purchases in excess of $100,000 per month. The
IDR/USD, which has fallen 14% over the past month, hit 12,000 in
trading on November 13. Many market analysts were surprised by the
move and worried that the regulations would prompt additional
short-term outflows and could undermine long-term investment
inflows. Although Standard & Poor's recently affirmed Indonesia's
sovereign credit rating, analysts also are increasingly concerned
about Indonesia's ability to finance its budget deficit if current
market conditions persist. The World Bank, in conjunction with
Japan and Australia, is close to finalizing a $5.5 billion standby
line of credit for Indonesia to provide some insurance against
adverse market conditions. Uncertainty surrounding the fate of BI's
wholly owned Netherlands-based subsidiary, N.V. De Indonesische
Overzeese Bank ("Indover Bank") has also weighed on Indonesia's
markets in recent weeks. End Summary.
BI Announces New Foreign Exchange Regulations
---------------------------------------------
2. (SBU) Bank Indonesia (BI) announced measures to regulate foreign
exchange purchases on November 12 in an effort to support the
rapidly declining Rupiah (IDR). The new measures require domestic
investors to provide banks with documentation of an underlying
transaction, such as the purchase of imports or the repayment of
loans, for any foreign exchange purchase in spot, forward or
derivative markets that exceed $100,000 per month. For transactions
less than that amount, domestic investors must sign a document
declaring that they have not purchased more than $100,000 in foreign
exchange over the course of that month from other Indonesian banks.
The same rules apply to foreign individuals and entities, but the
restrictions for foreigners apply only to spot market transactions.
The documentation required for foreign exchange transactions will
include a description of the underlying transaction type and amount,
the individual or firm's taxpayer ID, and a written declaration
confirming the accuracy of the information.
3. (SBU) BI targeted the new rules at domestic investors and
depositors, whom the government asserts are exacerbating current
pressure on the Rupiah. William Wallace, Chief Economist for the
World Bank's Indonesia office, believes the move was implemented to
discourage domestic investors from moving their bank deposits to
neighboring countries such as Singapore that have implemented a
blanket deposit guarantee. While many BI officials reportedly also
favor implementing a blanket deposit guarantee, Vice President Kalla
remains publicly strongly opposed.
IDR Hits 12,000
---------------
4. (SBU) The new regulations also reflect BI's increasingly narrow
policy options amid financial market volatility and markedly lower
growth prospects. The central bank is reluctant to raise interest
rates given the outlook for slower world and domestic growth and
cannot continue to defend the exchange rate through direct market
intervention indefinitely. Indonesia's official foreign exchange
reserves have declined by $10 billion since early August, in part
due to BI's defense of the IDR. Despite this intervention and a
series of measures designed to inject liquidity into the banking
sector, the currency continues to perform poorly, undermining price
stability and investor confidence. The IDR has depreciated 18.0%
against the USD in the last month, and breached 12,000 USD during
trading on November 13. Indonesia's currency has underperformed
other Asian currencies, with the Korean Won, the Indian Rupee and
the Philippine Peso, declining 13.3%, 2.1%, and 4.1%, respectively,
over the same 30-day period.
Significant Short-term and Long-term Implications
JAKARTA 00002092 002 OF 003
--------------------------------------------- ----
5. (SBU) Many market analysts were surprised by the move and worried
that the regulations would prompt additional short-term outflows and
undermine long-term investment inflows. Analysts in the region
generally concur that BI's new regulations do not represent a
significant increase in control over foreign exchange transactions.
The new rules impose a documentation requirement rather than a limit
on the size of foreign exchange transactions. However, the ease of
implementation of the new rules and their effectiveness remains
unclear, according to IMF resident representative Milan Zavadjil.
In addition, BI will not fully implement documentation requirements
until December 1, potentially prompting individuals and firms to
rush to purchase foreign exchange in the coming weeks, further
depressing the value of the currency.
6. (SBU) A number of analysts worried that the new rules would
undermine investor confidence in Indonesia over the longer-run as
global markets stabilize and funds return to emerging markets. In
addition, a November 13 Bank Danamon report points out that the new
regulations contain no export repatriation requirements, a caveat
that may discourage exporters from converting foreign currency
earnings back into IDR over time. Citibank and Bank Danamon
analysts also offered a more positive assessment of the new rules,
noting that if the new regulations successfully curb domestic
capital outflows and stabilize the IDR, longer-term investor
confidence in Indonesia may improve.
Sovereign Rating Affirmed, but Risk Remain High
--------------------------------------------- --
7. (SBU) Standard & Poor's recently affirmed Indonesia's 'BB-'
long-term foreign currency sovereign credit rating and 'BB+'
long-term local currency rating with a stable outlook. S also
affirmed the 'B' short-term sovereign credit rating and all senior
unsecured debt ratings. However, the stable outlook was based on
"...debt reduction in recent years and an improved policy
environment, particularly the flexible exchange rate regime, that
will enable the government to sustain an adequate external liquidity
cushion in the face of ongoing negative external shocks," a view
that may be adjusted in light of the new foreign exchanges rules.
S changed its sovereign rating outlook to negative for Pakistan,
Sri Lanka, and Vietnam.
8. (SBU) Despite S's vote of confidence, analysts remain concerned
about Indonesia's ability to finance its budget deficit if current
market conditions persist. The GOI moved early to reduce its budget
deficit and financing requirement, easing some concerns. However,
Indonesia's tax revenues are likely to fall more sharply in 2009
than first anticipated, particularly from commodity-based
businesses, as the global slowdown worsens, reducing Indonesian
corporate earnings. In a recent discussion with the embassy, mining
firm Freeport executives noted that their earnings in Indonesia and
tax revenues are likely to drop dramatically in the coming months.
Indonesian government bond yields also remain high, despite some
decrease in recent weeks. The yield on 10-year government bonds was
15.0% as of November 13, up from 12.1% in early September. The
World Bank, in conjunction with Japan and Australia, is close to
finalizing a $5.5 billion standby line of credit for Indonesia to
provide some insurance against adverse market conditions.
Indover Debacle Continues
-------------------------
9. (SBU) Bank Indonesia's wholly owned Netherlands-based subsidiary,
N.V. De Indonesische Overzeese Bank ("Indover Bank") is now in the
process of being settled by a court-appointed curator in the
Netherlands, as requested by the Netherlands Central Bank following
its October 7 default. BI abandoned a planned 546 million euro
bailout when it was unable to secure approval from a plenary session
of the Indonesian House of Representatives by October 31. While a
House Commission had approved the bailout in principle, BI was
JAKARTA 00002092 003 OF 003
unwilling to take action without plenary approval for fear of future
legal liability. On November 11, BI announced appointment of a team
to handle ongoing measures related to Indover.
10. (SBU) BI has stated it will coordinate with the Indonesian
government to mitigate possible impacts on the Indonesian banking
system arising from the liquidation. Several local banks have
announced significant lending exposure to Indover. On November 10,
IMF resident representative Milan Zavadjil told embassy he expected
BI will attempt to assist exposed Indonesian banks, but he did not
expect a quick resolution due to fear of associated legal risks.
Meanwhile, the Finance Ministry has requested the Attorney General's
Office to investigate the case, alleging that Indover management
misused a BI support letter provided to auditors in order to secure
two syndicated loans valued at $187.5 million. Indover Bank has
been the subject of previous investigations and BI and GOI officials
have been long rumored to have benefited from Indover operations.
HUME