VZCZCXRO8957
PP RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHJA #2207/01 3400010
ZNR UUUUU ZZH
P 050010Z DEC 08
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC PRIORITY 0889
INFO RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUCPDOC/USDOC WASHDC 1546
RHMFISS/DEPT OF ENERGY WASHINGTON DC
RUCNASE/ASEAN MEMBER COLLECTIVE
RUEHKO/AMEMBASSY TOKYO 2812
RUEHBJ/AMEMBASSY BEIJING 5700
RUEHBY/AMEMBASSY CANBERRA 3374
RUEHUL/AMEMBASSY SEOUL 5200
RHEHNSC/NSC WASHDC
RUEAIIA/CIA WASHDC
UNCLAS SECTION 01 OF 03 JAKARTA 002207
SENSITIVE
SIPDIS
DEPARTMENT FOR EAP/MTS, EAP/EP, EEB/IFD/OMA, E, EEB/ESC/IEC/ENR,
EEB/IFD/ODF
TREASURY FOR M.NUGENT AND T.RAND
COMMERCE FOR 4430 BERLINGUETTE/KELLY
ENERGY FOR PI-32/CUTLER AND GILLESPIE
DEPARTMENT PASS FEDERAL RESERVE SAN FRANCISCO FOR CURRAN
DEPARTMENT PASS EXIM BANK
SINGAPORE FOR S. BAKER
TOKYO FOR MGREWE
USDA/FAS/OA YOST, MILLER, JACKSON
USDA/FAS/OCRA CRIKER, HIGGISTON, RADLER
USDA/FAS/OGA CHAUDRY, DWYER
USTR WEISEL, EHLERS
E.O. 12958: N/A
TAGS: EFIN ECON ETRD EINV ID
SUBJECT: FINANCIAL CRISIS BEGINS TO TAKE TOLL ON REAL ECONOMY AND
GROWTH FORECAST REDUCED (AGAIN)
Ref: Jakarta 2140
1. (SBU) Summary: A sharp slowdown in export demand is beginning to
take a toll on Indonesia's real economy, resulting in a growing
number of layoffs and production cuts. Continued tight credit
markets are posing an added burden on business and played a role in
the government takeover and bailout of Bank Century. Coordinating
Minister for Economic Affairs and Finance Minister Sri Mulyani
Indrawati warned that 2009 economic growth could slow to 4.5%,
despite fiscal stimulus. With the Indonesian rupiah remaining weak,
Bank Indonesia provided further guidance on recently issued foreign
exchange regulations, explicitly prohibiting the purchase of foreign
exchange for the use of structured products aimed at return
enhancement. Lingering questions about the Bakrie Group's attempted
workout of debt issues continued to weigh on the equity market. End
summary.
Growth Forecast Reduced As Export Demand Falls
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2. (U) With total exports down 11.61% from September to October (see
septel) and a sharp downturn in orders for early 2009 from
traditional export markets, Indonesia's "real economy" is beginning
to experience the effects of the growing global economic slowdown.
With the outlook for 2009 economic growth remaining poor,
Coordinating Minister for Economic Affairs and Finance Minister Sri
Mulyani Indrawati has warned that 2009 economic growth may slow to
as low as 4.5%, substantially below the 6.2% rate the government
continues to expect for 2008. (Note: The Finance Minister's latest
estimate, made on December 2 to the House of Representatives, is for
2009 economic growth between 4.5 and 6 percent.) As reported
reftel, many market analysts continue to forecast 2009 growth of 3
to 4 percent, although domestic analyst forecasts tend to be
slightly higher.
Reports of Production Cuts and Layoffs Cause Alarm,
Prompting Calls for More Government Stimulus
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3. (U) Firms are beginning to react to worsening global economic
conditions by cutting production and laying off workers. The
Ministry of Labor and Migration has said that, as of November 28,
nearly 17,000 workers had already lost their jobs and about 6,600
had been laid off (year to date). Employers had already informed
the Ministry that they are in the process of dismissing another
24,000 employees, and laying off an additional 19,000 employees.
The job losses have been heaviest in the Jakarta area (over 14,000),
but are spread throughout the country. While job cuts in the formal
sector appear to have been relatively limited to date, many business
associations and firms have said they have also trimmed their
non-permanent, contract workforce. Firms also warned that they
expect additional layoffs and dismissals as export orders dry up and
they begin to cut production lines. The head of the Indonesian
Employers Association, Sofyan Wanandi, has been quoted in the press
as estimating as many as 500,000 to a million workers will lose
their jobs by mid-2009. In addition, there have been several
reports of planned investment projects that have been reduced,
deferred or canceled, given the uncertainty of future demand.
4. (U) In a December 2 hearing before the House of Representatives,
Sri Mulyani assured legislators the government was in the process of
speeding up a fiscal stimulus package. In addition to plans to
provide businesses with tax relief worth an estimated IDR 12.5
trillion in 2009, the government is trying to accelerate
infrastructure spending aimed at maintaining domestic demand. Other
government efforts to ease problems stemming from tight credit
JAKARTA 00002207 002 OF 003
markets, including plans to provide additional trade finance, remain
works in progress, with corresponding implementing regulations not
yet in place.
Takeover of Bank Century Has Raised
Questions About BI Oversight
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5. (SBU) The government's November 21 takeover of PT Bank Century
Tbk has raised questions about the quality of Bank Indonesia
oversight, as details behind Bank Century's liquidity difficulties
emerged. Bank Century's capital asset ratio fell from over 14% at
end-September to -2.3% in mid-November due to the default of risky,
non-rated securities held by the bank. The bank's controlling
shareholders also failed to provide additional needed capital,
despite having reportedly guaranteed these risky securities with
off-shore deposits. Although Bank Century attempted to negotiate a
sale of its assets, uncertainty about the bank's stability prompted
the government's decision to have LPS, the Indonesian Deposit
Corporation, take over the bank. LPS has announced that it has
already provided IDR 2.5 trillion (about $208 million) in temporary
additional capital to the bank, bringing its capital asset ratio to
about 10 percent. Yet media reports through end-November detailed
continued difficulties some depositors were experiencing in
withdrawing deposits, particularly foreign currency deposits, from
the bank.
6. (SBU) Indonesian authorities have arrested Bank Century's founder
and a major shareholders, Robert Tantular, on suspicions of unduly
influencing bank operations. The authorities also arrested the
bank's former president-director for breach of banking regulations.
BI has said it has sought the return of Bank Century assets
reportedly held in the U.K. and Singapore. Authorities are also
seeking return of bank funds from two other controlling
shareholders, who are not Indonesian nationals. Meanwhile, analysts
are predicting significant further consolidation in the banking
sector as depositors move funds to larger, more stable financial
institutions.
BI Clarifies Recent Foreign Exchange Regulations,
Reiterates Prohibition Against Speculative Activity
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7. (SBU) In the wake of continued rupiah weakness, Bank Indonesia
(BI) issued on November 28 additional guidance regarding its recent
foreign exchange regulations. A circular letter reiterated the
prohibition against the purchase of foreign exchange, in any amount,
for speculative activities. BI specified that speculative
activities included the use of structured products that combine
assets and foreign exchange derivatives for the sole purpose of
enhancing investment returns.
8. (SBU) A number of local market analysts welcomed moves aimed at
tightening Indonesia's capital account, which they believe creates
excessive vulnerability to short-term foreign exchange movements.
However, BI Governor Boediono reiterated Indonesia's commitment to
maintaining capital mobility in a statement on November 21. Few
market analysts expect authorities to impose significant new capital
controls.
Scrambling to Cover 2009 Budget Deficit
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9. (SBU) The government continues efforts to mobilize external
financing to fund the 2009 budget deficit. The World Bank is
preparing a policy package for its contingent Development Policy
JAKARTA 00002207 003 OF 003
Loan (see reftel) and is continuing to engage in further discussions
with the Asian Development Bank and Australia and Japan on
co-financing. The Ministry of Finance is also proceeding with plans
for a retail sukuk (Islamic bond) issuance for end-February. Plans
for a global USD sukuk issuance, originally scheduled for late 2008,
remain on hold given market conditions.
Bakrie Group: Lack of Transparency of New
Debt Deals Continues to Weigh on Market
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10. (U) The November 28 announcement by Bakrie & Brothers ("BNBR")
management that it had entered into two deals which would resolve
Bakrie Group debt problems has not eased the negative sentiment
surrounding the troubled Group. In a press release, BNBR announced
it had reached agreement with Northstar Pacific to form a strategic
partnership, transforming their previous sales and purchase
agreement into a buyout arrangement to take over BNBR's
collateralized assets from Oddickson Finance. Northstar and BNBR
plan to establish a joint venture company, which would own these
collateralized assets.
11. (SBU) While Northstar reportedly agreed to purchase $575 million
in Bakrie Group debt owed to Oddickson, the Financial Times has
reported that U.S. private equity firm Texas Pacific Group (TPG) had
withdrawn from the deal, putting into doubt Northstar's ability to
fund a debt purchase of that size. Northstar management has denied
TPG's withdrawal, but they have reportedly indicated its purchase of
Bakrie Group debt may occur over time, with an initial purchase of
perhaps $150 million. Such a go-slow approach, if adopted, would
suggest TPG is not willing to add additional capital beyond its
original stake in the Northstar Pacific equity firm.
12. (U) On November 28, local private equity firm Ancora Capital
Management also reportedly reached agreement to assume BNBR's
remaining $72 million debt to JP Morgan. Press reports differ about
whether Ancora will receive the Bumi Resources shares that had
secured the loan. BNBR's press release advised it had already
settled most of its direct debt and would arrange to resolve the
remaining debt of about $200 million, including debt owed to India's
ICICI Bank ($101.5 million) and to other local firms ($81.5 million)
by year's end. Meanwhile, state-owned enterprise PT Tambang
Batubara Bukit Asam announced that it would not participate in the
Northstar deal.
13. (SBU) Market reaction to the announcements of these developments
has been mixed, with observers complaining about the lack of
information on the structure of the strategic partnership and the
division of share ownership. Indonesia Stock Exchange management
has requested BNBR to provide more information about its various
agreements.
HUME