INDONESIA: WORSENING ECONOMIC PROSPECTS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00287R000400790001-3
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 8
• Document Creation Date: December 22, 2016
• Document Release Date: August 5, 2010
• Sequence Number: 1
• Publication Date: February 25, 1983
• Content Type: MEMO

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Central Intelligence Agency
DIRECTORATE OF INTELLIGENCE
25 February 1983
Indonesia: Worsening Economic Prospects
Indonesia's financi
examined the economy in
1982. That assessment projected a $7-8 billion current
account deficit and predicted that, barring signs of downside
slippage, Indonesia would be able to cover its deficit for 1983 25X1
without having to resort to unacceptably stiff domestic austerity
measures. The likelihood of a decline or, possibly, downward
spiral in nominal oil prices, the continuing soft market for non-
energy raw materials; and a below average rice crop expected this
year have in our judgment caused a deterioration in prospects and
raise questions about how long financiers will continue to
provide funds to the government without strong remedial action by
Jakarta. Under the most optimistic scenario, Indonesia will have
a large current account deficit to cover in 1983; should oil
prices tumble, the government would be forced to adopt more
stringent and politically difficult austerity measures. 25X1
The weak oil market is pushing down both volumes and prices
of Indonesia's crude oil exports while foreign demand for its
traditional nonoil exports remains soft.
-- Crude oil output fell below 1.1 million b/d in January,
500,000 b/d below capacity, and 200,000 b/d below
Indonesia's OPEC quota. Each 100,000 b/d drop in exports
costs Indonesia over $1.2 billion in annual revenue at
current prices.
This memorandum was prepared byl (Malaysia,
Singapore, Islands Branch, Southeast Asis Division, Office of
East Asian Analysis of the Directorate of Intelligence. It was
coordinated within the Directorate of Intelligence and the
National Intelligence Council. Information available as of 24
February was used in its preparation. Comments are welcome and
may be directed to the Chief, Southeast Asis Division
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-- It now appears that nominal oil prices will at a minimum
fall by $3 to $4 per barrel, causing foreign exchange
earnings from LNG, Indonesia's second largest export
commodity, to fall in line with crude oil price cuts.
Each $1 drop in oil prices at 1982 export levels reduces
combined oil and gas export revenues by some $350 million
annually.
-- Recovery in exports of wood, rubber, coffee, tin, palm
oil and other traditional agricultural and mineral
products has not yet materialized and appears likely to
lag the economic recovery of major markets in the United
States, Japan, and Western Europe.
Without a dramatic improvement in export performance or a
drastic shift in import policy, we now estimate the current
account deficit in 1983 will fall in the $9-11 billion range
compared to an estimated $7.4 billion last year and could be even
higher if oil prices spiral downward. This estimate includes a
projected 5 percent increase in import volume in 1983 based on
spending plans already in place. 25X1
Even under what now appears to be a best case, Indonesia's
current account deficit will increase in 1983, forcing the
government to adopt tougher austerity measures later this year.
However, we cannot rule out a downward spiral in oil prices. In
this event, Jakarta would have to take drastic action on imports
to keep the deficit within bounds. Such action would lead to a
sharp increase in domestic inflation, a decline in living
standards, and a further slowdown in the country's economic
growth rate. 25X1
Despite prospects for a sizable current account deficit,
Jakarta is pressing ahead with most major industrial development
programs. An austerity program introduced this year does reduce
subsidies for fuel, food, and fertilizers, freezes civil servant
and military wages, and cuts back on other current outlays. 25X1
Given current policies, we believe Jakarta's likely import
performance offers little promise of financial relief in 1983.
Capital and intermediate goods needed largely to fuel the
development program account for nearly 90 percent of imports and
consumer goods for only about 10 percent. Even if the government
should risk economic dislocations by freezing imports, a lengthy
drought in 1982 delayed planting of this year's major rice crop
and could cut the 1983 rice harvest by 10 percent. In this
event, Jakarta could be forced into the international market for
1.5-2.0 million tons of rice, a level equivalent to the lat
1970s when Indonesia was the world's largest rice importer 25X1
-2- 25X1
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On the financial front, Jakarta is moving to line up
increased foreign borrowing. In 1982, Indonesia's strong
financial position and the widespread belief that the world oil
glut would be temporary enabled it to finance the current account
deficit through a combination of borrowing abroad and drawing
down reserves. This year, we believe Jakarta will be very
reluctant to draw down official reserves sharply below the
current level of about $4 billion. The government has access to
about $4 billion of net foreign assets accumulated by the state
banks over the past few years and Bank Indonesia officials are
arranging a $1 billion syndicated loan, which will be the second
largest commercial credit ever obtained by an Asian borrower.
The Indonesians are finding it necessary, however, to pay a
higher interest rate than previously and are displaying growing
nervousness over the availability of funds. Press reports
indicate Indonesia is considering asking the IMF for $600 million
in financial assistance to help compensate for the fall in its
export prices.
Although international bankers as a group remain bullish on
Indonesia, many are becoming
increasingly nervous over eir exposure. Any further weakening
in Jakarta's external accounts, or even a failure to show signs
of improvement, could intensify bankers' fears and sharply reduce
the availability of funds. This, in turn, would force Jakarta to
deal with additional politically difficult spending cutbacks.
Indonesia's poor export performance and the government's
austerity program so far have not led to serious civil
disturbances. Nonetheless, sharper inflation resulting from cuts
in consumer subsidies, scattered food shortages, and growing
unemployment are intensifying the already severe pressure on
Indonesia's poor. In the past, price hikes and shortages of
consumer goods have sparked urban rioting.
The government is carefully monitoring the political
opposition and potentially disruptive groups such as unemployed
youth, students, labor, and Muslims. Security officials are on
the alert to suppress any threat to disrupt the 1-11 March
session of the People's Consultative Assembly (MPR), which is
meeting to reelect President Soeharto to another five year term,
and to approve his choice for Vice President and the regime's
political guidelines for the next five years. The highlight of
the session is to be the designation of Soeharto as Indonesia's
"Father of Development."
-3-
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Although opposition to the regime has been muted, there
seems little doubt that disaffection is growing. Indeed, some
observers see growing disaffection even among Soeharto's
loyalists in the bureaucracy because of the government wage
freeze and an incease in corruption by officials to make up for
the loss in real income caused by the freeze -- a development
that would further alienate Indonesia's have-nots. The
possibility of anti-Chinese riots sparked by some minor incident
is always present, and the current economic situation increases
the danger that such riots could quickly develop an anti-Soeharto
or antigovernment character.
-4-
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Indonesia: Current Account Scenarios, 19831
25X1
Crude Oil Exports
(1,000 b/d)
1,100 1,000 8752 775
Current Account Balance (Billion US dollars)
$33.602
-6.2 -7.4 -9.0 -10.2
PRICE PER
$30.003
-7.4 -8.5 -10.0 -11.1
BARREL
$27.003
-9.0 -10.0 -11.3 -12.3
$25.003
-10.0 -11.0 -12.1 -13.1
$20.003
-12.5 -13.3 -14.2 -15.0
'Projections assume: 1) 5 percent real growth in imports in 1983. Each 1
percent reduction in imports would cut the current account deficit by $200
million; 2) nonoil exports are assured to grow at 5 percent with no adjustment
made for faster world econaric growth caused by lower oil prices.
2Indonesia's average price and volume for 1982.
3OPEC average prices.
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Indonesia: Change in Real Imports that Would Hold
1983 Current Account Deficit to $8 Billion'
Crude Oil Exports
(1,000 b/d)
1,100
1,000
8752
775
$33.602
+14 %
+ 8 %
0 %
- 6%%
PRICE PER
$30.003
+ 8 %
+ 3 %
- 5 %
-10 %O
BARREL
$27.003
0 %
- 5 %
-12 %
-16 %
$25.003
- 5 %
-10 %
-16 %
-20 %
$20.003
-18 %
-22 %
-26 %
-30 %
'These projections assure a 5 percent real increase in nonoil exports with no
adjustment made for faster world econanic growth caused by lower oil prices.
2Indonesia's average price and volune for 1982.
3OPEC average prices.
-R-
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SUBJECT:
Indonesia: Worsening Economic Prospects I
25X1
1--
OEA/SEA/ITB
1--
OEA/SEA/MSI
1--
OEA/SEAD
1--
D/OEA
1--
C/Production/OEA
1--
PDB (7F30)
1--
C/NIC (7E62)
1--
NIO/EA (7E62)
2--
DDI (7E44)
1--
C/PES/DDI (7F24)
1--
Executive Director (7E12)
5--
CPAS/IMB/CB
1--
Paul Wolfowitz/State
1--
Anthony Albrecht/State
1--
Frederick Z. Brown/State
1--
Alphonse F. LaPorta/State
1--
Hugh Montgomery/State
1--
Richard Childress/NSC
1--
Douglas P. Mulholland/Treasury
1--
David A. Peterson/Commerce
1--
Ronald L. Smith/Energy
Note: 1 Copy hand carried to Armitage on Thursday, Feb. 24, 1983
OEA/SEA/MSII I (28 February 1983)
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Short note sent out to people at Department of State,
Department of Commerce, Department of Energy, Department
of Treasury, and NSC.
Office of East Asian Analysis
DIRECTORATE OF INTELLIGENCE
NOTE, FOR: The Honorable Paul Wolfowitz
The Assistant Secretary for
East Asian and Pacific Affairs
Department of State
Paul,
The attached memorandum briefly outlines
our growing concerns over Indonesia's
financial prospects. The possibility of a
decline in oil prices and failure of other
raw material prices to stage a comeback have
put Indonesia in a difficult financial
position. While the international financial
community still considers Indonesia one of
Asia's better credit risks, the situation is
deteriorating and should be watched closely.
Attachment:
As stated above
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