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Cablegate: Indonesia Trade and Investment Highlights - February 2007

VZCZCXRO9940
RR RUEHCHI RUEHDT RUEHHM
DE RUEHJA #0777/01 0790736
ZNR UUUUU ZZH
R 200736Z MAR 07
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 3903
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUEHKO/AMEMBASSY TOKYO 0410
RUEHBY/AMEMBASSY CANBERRA 0546
RUEHBJ/AMEMBASSY BEIJING 3995

UNCLAS SECTION 01 OF 05 JAKARTA 000777

SIPDIS

SIPDIS

DEPT FOR EB/TPP/MTA AND EAP/MTS
TREASURY FOR IA-SEARLS
USDOC FOR SBERLINGETTE/4430
DEPT PASS USTR DKATZ

E.O. 12958: N/A
TAGS: ETRD EINV ECON KIPR ID
SUBJECT: INDONESIA TRADE AND INVESTMENT HIGHLIGHTS - FEBRUARY 2007

1. Summary: Minister of Trade Mari Pangestu said on February 26
that a global economic slowdown could reduce Indonesia's export
growth to 14.5% in 2007, lower than the Government of Indonesia's
(GOI) 20% target. The GOI issued a regulation on January 2 granting
tax incentives for Indonesian companies or cooperative investments
in certain business sectors. According to industry data, domestic
motorcycle sales rose 28.5% in January 2007 on a year on year (YoY)
basis, while automobile sales grew only 0.62% in January 2007 and
dropped 8% in February 2007 YoY. The Investment Coordinating Board
(BKPM) announced on February 7 that realized foreign direct
investments (FDI) in Indonesia's automotive sector reached $438.5
million in 2006. Riken Corporation of Japan and PT. Pakarti Riken
Indonesia announced they would begin manufacturing vehicle engine
camshafts in Indonesia to supply the Southeast Asia region beginning
this summer. The Ministry of Trade (MOT) announced on February 26
that it would not allow a Japanese 7-Eleven retailer to expand its
operations to Indonesia without a local partner. The MOT also
announced on February 14 that it has authorized BULOG to import
500,000 tons of rice from March to April 2007. Indonesia's Toll
Road Regulatory Body (BPJT) announced on February 16 that it will
tender six toll road projects in the Jakarta area. High world
commodity prices drove Indonesia's exports in 2006 to a record
$100.7 billion. End summary.

GOI Sets 2007 Export Growth Target of 20%
-----------------------------------------

2. Vice President Jusuf Kalla chaired a cabinet level coordination
meeting on trade on February 26 to discuss ways to meet President
Yudhoyono's goal of 20% export growth in 2007. After the meeting,
Kalla told the press Indonesia's improving infrastructure and
financial sector strength will enable the country to meet this
target. He asked that that the country's banking sector increase
lending and other support to the export manufacturing sector.
However, according to press reports, Trade Minister Mari Pangestu
said that 14.5% export growth was a more reasonable target for 2007.
She noted that the world economy may be slowing and that existing
stockpiles of commodities could drive down record high commodity
prices, as well as the value of Indonesia's total exports in 2007.
Indonesia recorded export growth of 19.7% percent in 2006 with total
exports topping $100 billion ($100.7 billion) for the first time.

GOI Implements New Investment Incentives
----------------------------------------

3. On January 2, the GOI issued a regulation (PP1) granting tax
incentives for Indonesian domestic investments in certain business
sectors effective January 1, 2007. The new regulation provides:

-- Accelerated depreciation of fixed assets at twice the rate under
normal circumstances;

-- Tax loss carry-forward up to 10 years (instead of 5);

-- Investment tax credit reduction of net income by 30% of capital
(land, buildings, equipment) invested to be pro-rated over six
years, at 5% per year.

Only investments in Indonesian companies (domestic "PT" or limited
liability companies) or Indonesian cooperatives ("Koperasi") qualify
for the incentives. Qualifying investments must also be made in the
following sectors:

- Food seasoning;
- Textiles and garments;
- Pulp and Paper;
- Carton and Cardboard;
- Industrial or chemical substances;
- Rubber or rubber products;
- Porcelain;
- Base metals, base iron and steel;
- Machinery and accessories;
- Electric motors, generators, transformers;
- Electronics;
- Land transportation;
- Ship building and repair.

4. Some investment analysts have raised concerns about the scope of
the regulation, noting that the GOI should expand it to encourage
more high-tech and capital intensive investments. They added that,
without significant GOI progress in implementing other promised
investment related reforms, it is unlikely that the new regulation

JAKARTA 00000777 002 OF 005


will have a significant impact on new investment, particularly from
overseas.

Motorcycle Sector Rebound; Autos Remain Sluggish
--------------------------------------------- ---

5. The Indonesian Motorcycle Industry Association (AISI) announced
on February 19 that domestic motorcycle sales rose to 342,773 units
in January 2007, a 28.5% increase YoY from 266,618 units. AISI also
reported that Astra International -- the largest motorcycle dealer
in Indonesia -- increased its market share slightly to 45% in
January 2007 from 44% a year earlier. Honda and Yamaha products
dominate Indonesia's domestic motorcycle market. Honda sales rose
31.4% YoY to 153,806 units in January, while Yamaha recorded a 25.4%
increase YoY to 133,200 units.

6. Indonesia Automotive Industries Association (Gaikindo) announced
on February 19 that domestic car sales reached 26,788 units in
January 2007, a slight increase of 0.62% YoY from 26,622 units in
2006. Car sales, however, subsequently fell 8 percent in February
2007 to 23,811 from 25,959 units in February 2006. Gaikindo
reported that Astra International -- Indonesia's largest car dealer
-- suffered a drop in market share to 56% in January 2007 from 65%
in January 2006. Astra's car sales fell to 15,016 units in January,
from 17,351 a year earlier, and from 16,390 in December 2006. Astra
Investor Relations Head Richard Santosa said on February 19 that the
company no longer enjoyed the backlog of orders that boosted sales
for most of 2006. Indonesia's vehicle sales plunged by roughly 40%
in late 2005 and early 2006 following an October 2005 GOI decision
to dramatically reduce fuel subsidies. Subsequent higher fuel
prices have caused consumers to shift to smaller more fuel-efficient
models. Vehicle sales reached a record high of 533,910 units sold
in 2005, but plunged to just 318,883 units sold in 2006, a decline
of 40%. Industry analysts predict vehicle sales will reach between
350,000 and 400,000 units in 2007.

Table 1: Domestic car sales
--------------------------------------------- -------
Brand/company Jan 07 Feb 07 Jan 06 Feb 06
--------------------------------------------- -------
Honda 2,313 3,350 3,598 2,384
Suzuki 3,837 3,504 2,330 2,768
Toyota 9,530 8,057 13,191 9,609
Astra International 15,016 12,490 17,351 15,872
Daihatsu 4,097 2,997 2,842 2,728
Mitsubishi 3,658 2,305 1,979 3,314
--------------------------------------------- -------
Total 26,788 23,811 26,622 25,959
--------------------------------------------- -------
Source: Gaikindo

7. The Investment Coordinating Board (BKPM) announced on February 7
that actual realized foreign direct investment (FDI) in the
automotive sector reached $438.5 million in 2006, the highest amount
in the last six years. The BKPM reported that foreign investors
implemented 28 projects in the automotive sector in 2006, compared
to 31 projects in 2005. The $438.5 million figure represents a 22%
from the $359.7 million invested in 2005. According to BKPM, the
automotive sector accounted for 7.3% of total FDI projects in 2006.

Japan Investor to Produce Automobile Parts
------------------------------------------

8. Japan's Riken Corporation and its domestic partner PT. Pakarti
Riken announced on February 23 that they will begin production of
camshafts for automobile engines in Indonesia by the summer of 2007.
Riken says that the move is part of the company's broader efforts
to cut delivery times and integrate production operations in
Southeast Asia. Riken will hold a 40% stake in the endeavor and
will invest $2.5 to $3.3 million in facilities that can manufacture
50,000 automobile camshafts per month. Riken said it chose
Indonesia as a production base because large automakers, such as
Toyota and Daihatsu, are increasing production in the country.

MOT Requires 7-Eleven
Retailer to Use Local Partner
-----------------------------

9. Minister of Trade Mari Pangestu announced on February 26 that
her ministry would not approve plans of a Japanese 7-Eleven retailer
to expand into Indonesia's retail sector. With support from the
Government of Japan, the retailer proposed to invest in a retail

JAKARTA 00000777 003 OF 005


chain that it would fully own and control. According to Pangestu,
the GOI would not alter existing Indonesian retail regulations,
regardless of the outcome of Economic Partnership Agreement (EPA)
negotiations between the two countries. Minister of Trade Decree on
Franchising No.12/2006 requires that international franchises use
local partners when expanding operations to Indonesia. In recent
years, mini-market franchises have spread across Indonesia,
particularly in urban areas. Growth of these modern markets has
increased government revenue and formal sector employment. However,
the country's traditional traders often complain that they cannot
compete with the lower prices of mini-markets and larger
hypermarkets. Traditional traders and some politicians in the past
have called on the GOI to place greater controls on the development
of modern markets in Indonesia.

MOT Authorizes BULOG to Import Rice
-----------------------------------

10. Following a rice coordination meeting on February 13, the MOT
announced on February 14 that it has authorized the National
Logistic Agency (BULOG) to import 500,000 tons of rice. On February
21, BULOG indicated that it would import 200,000 tons of rice
through government to government mechanisms, 200,000 tons through
direct appointment to certain rice importers, while the remaining
100,000 tons would be sourced through an open tender process.
Ministry of Trade authorization letter no. 138/2007 authorizes BULOG
to import the following amounts of rice through 14 ports between
March and
April this year:

-- Lhokseumawe, Aceh 6,000 tons
-- Belawan, North Sumatra 24,000 tons
-- Teluk Bayur, West Sumatra 12,000 tons
-- Dumai, Riau 22,000 tons
-- Panjang, Lampung 36,000 tons
-- Tanjung Priok, Jakarta 40,000 tons
-- Tanjung Emas, Central Java 60,000 tons
-- Tanjung Perak, East Java 180,000 tons
-- Ujung Pandang, South Sulawesi 24,000 tons
-- Pare-pare, South Sulawesi 42,000 tons
-- Celukan Bawang, Bali 6,000 tons
-- Mataram, West Nusa Tenggara 12,000 tons
-- Kupang, East Nusa Tenggara 30,000 tons
-- Jayapura, Papua 6,000 tons

11. Rice is a staple food for most Indonesians and constitutes a
significant component of poverty calculations in the country. From
January 1 - March 2, 2007, rice prices increased 17.7% to $0.67 per
kg. An October 2006 World Bank Study indicated that rice price
increases were largely responsible for an increase in Indonesia's
poverty rate in 2006 to 17.8% from 16% in 2005.

Jakarta Toll Road Tenders Move Forward
--------------------------------------

12. Indonesia's Toll Road Regulatory Body (BPJT) announced on
February 16 that it would tender six toll road projects in the
Jakarta area worth an estimated $2.55 billion. The BPJT said that
the projects are part of a Jakarta provincial government initiative
to build new highways to reduce traffic congestion in the city. Bid
selections will reportedly begin in June and July 2007. The six
projects include:

-- A 9.65 km road connecting Kemayoran in Central Jakarta and
Kampung Melayu in East Jakarta;

-- A 11.38 km road connecting Tomang in West Jakarta and Kampung
Melayu in East Jakarta;

-- A 18.95 km road connecting Rawa Buaya in West Jakarta and Sunter
in North Jakarta;

-- A 14.73 km road connecting Sunter in North Jakarta and Pulo
Gebang in East Jakarta;

-- A 9.56 km connecting Pasar Minggu in South Jakarta and Casablanca
in Central Jakarta; and

-- A 8.27 km connecting Ulujami in South Jakarta and Tanah Abang in
Central Jakarta

Information on the tender can be found on the Indonesian Ministry

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of Public Work website at https://eproc.pu.go.id.

Indonesia Rides the Commodities Boom
------------------------------------

13. Indonesia's exports soared for the first time to over $100
billion in 2006, underpinning respectable gross domestic product
growth of 5.55 for the year. A rise in non oil and gas exports,
particularly commodities, drove the country's strong export
performance. In general, high prices, rather than increases in
export volumes, led to the large increases in many commodities
(Table 3). Among commodities, close analysis of Indonesia's trade
data, however, indicates that 2006's non-oil export boom largely
resulted from high world commodity prices rather than significant
increases in export volumes. Exports of Indonesia's top
manufactured goods have remained flat or declined. Most analysts
believe that Indonesia can likely depend on continuing strength in
global commodity prices to support solid export-led GDP growth. In
the longer term, though, limited investment in manufacturing
facilities and growing infrastructure bottlenecks may hinder export
growth, especially if commodity prices flatten out.

-----------------------------------------
Table 2: Indonesia Trade Performance 2006
(in $ billions)
-----------------------------------------
2005 2006 % YoY(1)
-----------------------------------------
Exports 85.6 100.7 17.5
Oil and Gas 19.2 21.2 10.2
Non-oil and Gas 66.4 79.5 19.7

Imports 57.7 61.0 5.8
Oil and Gas 17.5 18.9 8.7
Non-oil and Gas 40.2 42.1 4.6

Balance of Trade 27.9 39.7 42.3

(1) Percent increase year-on-year.

--------------------------------------------- -----
Table 3: Indonesia's Top Non-Oil and Gas Exports
2006 (in $ billions)
--------------------------------------------- -----
Commodity 2005 2006 Pct of
Total
2006
--------------------------------------------- ----
Electrical tools 7.33 7.30 9.18
Coal 4.48 6.47 8.14
Crude Palm Oil 4.95 6.00 7.56
Rubber and rubber products 3.58 5.54 6.97
Ash and Residues 3.49 4.90 6.17
Machinery/mechanical tools 4.56 4.39 5.52
Garments - not Knitted 3.07 3.38 4.25
Wood and wood products 3.11 3.33 4.19
Copper 1.26 1.90 2.40
Chemical Organic 1.53 1.83 2.30

Total top 10 products 37.38 45.06 56.67
Other 29.05 34.45 43.33
Total non-oil and gas exp 66.43 79.50 100.00

--------------------------------------------- ----
Table 4: Indonesia's Main Non-Oil and Gas
Export Destinations
2006 (FOB value, in $ billions)
--------------------------------------------- ----
Country of 2005 2006 Percent of
Destination Total (2006)
--------------------------------------------- ----
Japan 9.56 12.20 15.35
European Union 10.23 11.96 15.04
U.S.A. 9.51 10.66 13.41
Singapore 7.07 7.81 9.82
China 3.96 5.45 6.86
Malaysia 3.31 3.73 4.69
South Korea 2.59 3.40 4.28
Taiwan 1.78 2.27 2.86
Australia 1.13 1.62 2.04
Others 17.27 20.39 25.66
---------------------------------------------

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Total 66.43 79.50 100.00

Source: Central Bureau of Statistics (BPS)

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