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Cablegate: Indonesia Trade and Investment Highlights - July

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DE RUEHJA #9941/01 2200645
ZNR UUUUU ZZH
R 080645Z AUG 06
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 8423
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUEHKO/AMEMBASSY TOKYO 9962
RUEHBY/AMEMBASSY CANBERRA 9812
RUEHBJ/AMEMBASSY BEIJING 3570

UNCLAS SECTION 01 OF 03 JAKARTA 009941

SIPDIS

SIPDIS

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

E.O. 12958: N/A
TAGS: ETRD EINV ECON KIPR ID
SUBJECT: INDONESIA TRADE AND INVESTMENT HIGHLIGHTS - JULY
2006

1. Summary: The Indonesian Chamber of Commerce met with
members of Indonesia's Parliament on July 5 and voiced
general support for the Government of Indonesia's (GOI)
draft investment law. The Minister of Trade announced on
July 26 that the GOI will establish an Investment Policy
Committee and an accompanying full-time secretariat, staffed
by private sector consultants and senior government
officials. On July 17, Indonesia and Singapore established
a Joint Steering Committee to implement a bilateral
Framework Agreement, signed on June 25, to create a Special
Economic Zones (SEZ) in Indonesia's islands of Batam, Bintan
and Karimun. The Ministry of Industry on July 11 announced
that the GOI is considering tax allowances to encourage
investment in Indonesia's petrochemical industry. The
Indonesia Investment Coordinating Board (BKPM) said on July
11 that during the first half of 2006, 24 foreign investors
have submitted plans to establish pharmaceutical factories
in Indonesia. The Minister of Trade announced on July 10
that the GOI will extend its rice import ban until December
2006. Minister of Finance Sri Mulyani told Parliament on
July 5 that the GOI will make further revisions to its draft
customs law to include special provisions for special
economic zones. The Indonesian Textile Association (API)
admitted on July 17 that several of its former members had
engaged in illegal transshipment of textiles and garments
through Indonesia to the United States. Car sales in
Indonesia showed some sign of recovery in June. End
summary.

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Business Community Discusses Investment Law with Parliament
--------------------------------------------- --------------

2. Members of the Indonesian Chamber of Commerce (KADIN)
met with Parliament's Commission VI on July 5 to discuss the
GOI's draft investment law. KADIN members told the
Commission that their organization generally supports the
draft investment law and the government's efforts to move
from an investment approval to an investment registration
regime. They expressed concern, however, that the new law
did not contain specific investment incentives. KADIN
members said that more clearly defined tax holidays, tax
allowances and other beneficiary tax deductions would
improve investor interest and confidence in Indonesia.

GOI to Establish Investment Policy Secretariat
--------------------------------------------- -

3. The Ministry of Trade on July 26 held a public outreach
forum for foreign and domestic investors, business
associations and the diplomatic community to discuss the
GOI's draft new investment law. Minister of Trade Mari
Pangestu told the gathering that the GOI intended to
establish a government Committee on Investment Policy with a
full-time secretariat to better coordinate investment policy
and resolve investment disputes. The government plans to
staff the secretariat with private sector investment
professionals and senior government officials from relevant
agencies.

Indonesia-Singapore Establish Joint Steering Committee
--------------------------------------------- ---------

4. Indonesia and Singapore established on July 17 a Joint
Steering Committee (JSC) to implement the bilateral
Framework Agreement on Economic Cooperation, signed on June
25, to develop a Special Economic Zone (SEZ) in Indonesia's
islands of Batam, Bintan and Karimun. Indonesian
Coordinating Minister for Economy Boediono and Singaporean
Minister of Trade and Industry Lim Hng Kiang will chair the
JSC and a working group will define concrete steps to
implement the Framework Agreement. Singapore will provide
support in the areas of investment promotion and marketing,
training of SEZ administrators, and vocational training.

5. The JSC will aim to improve the investment climate in
Batam, Bintan and Karimun by reviewing taxation rules,
improving services to investors, simplifying customs and
visa procedures, and providing more integrated service
systems. Separately, Minister of Trade Pangestu announced
that Batam will soon establish the country's first on-line,
one-stop facility for business registration and licensing,

JAKARTA 00009941 002 OF 003


taxes, and customs. The Minister expects the facility to
conduct a first simulation of its new services sometime by
the end of July.

GOI Considers Tax Allowance for Chemical Sector
--------------------------------------------- ---

6. Ministry of Industry Director General for Agro and
Chemical Industry Benny Wahjudi announced on July 11 that
the government is considering offering a five-to-six year,
30 percent tax holiday for investors in the chemical sector.
The move would specifically aim to encourage greater
investment in Indonesia's petrochemical sector. According
to Wahjudi, Indonesia needs at least two more olefin plants
to meet domestic demand. Indonesia reportedly imports 1.4
million tons of olefin per annum (mostly from Japan), with
domestic production meeting only 15 percent of local demand.

Investors to Build Pharmaceutical Factory
-----------------------------------------

7. The Indonesian Investment Coordinating Board (BKPM)
announced on July 11 that, in the first half of 2006, 24
separate foreign investors registered investment plans to
build new pharmaceutical factories in Indonesia worth up to
USD 537.8 million. According to the BKPM, the investors are
seeking to take advantage of Indonesia's large domestic
market and Association of Southeast Asian Nations (ASEAN)
commitments that obligate all ASEAN member states to open
their markets to prescription drugs and ASEAN produced
pharmaceutical products by 2008. At present, Indonesia's
existing 198 pharmaceutical factories are controlled by four
state-owned enterprises, 31 foreign companies, and a number
of private local enterprises.

GOI Extends Rice Import Ban
---------------------------

8. Minister of Trade Pangestu announced on July 10 that the
GOI has extended its rice import ban until the end of 2006
due to an expected surplus in domestic production. Minister
of Agriculture Anton Apriantono expressed optimism that
Indonesia would reach its 2006 production target of 54.75
million metric tons of unhusked rice and a 109,000 tons
surplus would obviate the need for short-term rice imports.
The GOI first imposed the current rice import ban in January
2004 and the GOI reviews the ban every six months.

GOI to Revise Draft Customs Law
-------------------------------

9. Minister of Finance Sri Mulyani and Director General for
Customs and Excise Anwar Suprijadi told Parliament's
Commision VI on July 5 that the government intends to
further revise its draft customs law to include provisions
regulating import duties for SEZs. Senior GOI officials
continue to discuss plans to establish as many as eight SEZs
across Indonesia as a means of speeding up implementation of
investment reforms and attracting foreign and domestic
direct investment. According to Mulyani, the current draft
law aims improve customs services, reduce bureaucratic
delays and help improve the overall business climate in
Indonesia. The GOI has set a deadline of the end of 2006
for the passage of the law. It is uncertain whether the
proposed revisions will delay its passage into 2007.

Garment Industry Admits Transshipments Took Place
---------------------

10. The Indonesian Textile Association (API) Executive
Secretary Ernovian G. Ismy admitted on July 17 that four

SIPDIS
former API members had illegally transshipped textiles and
garments through Indonesia to Mexico and eventually on the
United States during 2005. Ismy did not comment as to
whether API or the GOI intended to punish these violators.
API initiated its investigation into the industry at the
behest of the Minister of Trade.

Car Sales Show Modest Recovery
------------------------------


JAKARTA 00009941 003 OF 003


11. Indonesian car sales increased 6.4 percent in June to
24,564 units from 23,022 units in May, signaling some recent
market recovery. On June 11, Chairman of the Indonesian
Automotive Industries Association (Gaikindo) Bambang Trisulo
expressed optimism that this positive trend would continue
into July. In the wake of sharp fuel price and interest
rate increases, total car sales for the first semester of
2006 dropped to 149,577, a 50 percent decline from 295,776
units during the same period of 2005. Automobile industry
analysts say that higher fuel prices and interest rates are
causing consumers to shift to purchasing smaller and more
fuel-efficient vehicles.

--------------------------------------------- ------
Table 1: Indonesia Trade Performance Jan-June 2006:
(in USD billions)
--------------------------------------------- ------
Jun Jun Pct 2005 2006 Pct
2005 2006 YoY Jan- Jan- YoY
Jun Jun
--------------------------------------------- ------
Exports 6.7 8.5 26.8 40.7 46.9 15.2
Oil and Gas 1.5 1.8 20.0 8.8 10.4 18.1
Non-oil and Gas 5.2 6.7 28.8 31.9 36.5 14.4

Imports 4.7 5.6 19.4 28.4 28.8 1.4
Oil and Gas 1.3 2.1 61.5 7.9 8.9 12.6
Non-oil and Gas 3.4 3.5 2.9 20.5 19.9 -2.9

Balance of Trade 2.0 2.9 45.0 12.3 18.1 47.1

--------------------------------------------- -----
Table 2: Indonesia's Top 10 Non-Oil and Gas Export
January to June 2006 (in USD billions)
--------------------------------------------- -----
Commodity 2005 2006 Percent of
Jan- Jan- Total 2006
Jun Jun
--------------------------------------------- -----
Electrical tools 3.53 3.55 9.73
Coal 1.99 2.69 7.37
Rubber and rubber products 1.68 2.61 7.16
Machinery/mechanical tools 2.21 1.94 5.33
Copper, Ash and Residues 1.48 1.65 4.54
Garment - not Knitted 1.50 1.64 4.50
Wood and wood products 1.64 1.53 4.20
Household and lighting 1.01 1.05 2.88
Footwear 0.72 0.87 2.39
Fish and Shrimp 0.75 0.82 2.26

Total top 10 products 16.55 18.39 50.37
Other 15.36 18.12 49.63
Total non-oil and gas exp 31.91 36.51 100.00

-----------------------------------------
Table 3: Indonesia's Main Non-Oil and Gas
Export Destinations
January to June 2006 (FOB value, in USD billions)
--------------------------------------------- ----
Country of 2005 2006 Percent of
Destination Jan-Jun Jan-Jun Total (2006)
--------------------------------------------- ------
Japan 4.73 5.29 14.51
U.S.A. 4.63 5.20 14.27
Singapore 3.54 3.83 10.50
China 1.85 2.39 6.56
Malaysia 1.54 2.03 5.56
South Korea 1.16 1.43 3.93
European Union 4.92 5.48 15.02
Taiwan 0.84 1.03 2.83
Australia 0.52 0.70 1.92
Others 8.15 9.09 24.90
---------------------------------------------
Total 31.91 36.51 100.00

Source: Central Bureau of Statistics (BPS)

PASCOE

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