Edition 5 October 2004

REGIONS

House Passes New Autonomy Bills

The outgoing House of Representatives (DPR) passed on Wednesday (29/9/04) a bill amending the regional administration law.

All nine factions in the House backed the changes to Law No. 22/1999 on regional autonomy.

The bill allows for regional leaders to be directly elected by their constituents, but also gives the central government the power to dismiss them for corruption, acts of terrorism, mutiny and activities that pose a threat to national security.

The regions will not be able to issue regulations that are in contradiction with central government rules.

Observers hope the changes will remove the tendency of the regions to pass bylaws aimed at boosting revenue but which tend to add to the cost of doing business.

Critics say the amended Law unnecessarily bans individual candidates for running for regional positions, saying this perpetuates the power elite’s control of political life.

The regions will receive a greater portion of revenue from oil and gas, general allocation funds (DAU) and proceeds from bonds under parallel revisions to Law No. 25/1999, to be known as the Intergovernmental Fiscal Balance Law.

Regions will receive 15.5% of revenue from oil, while gas-producing regions will take 30.5%, with the government taking the remainder.

Under the 1999 law, the government gave 15% of oil revenue and 30% of gas revenue to the concerned provinces. The new oil and gas revenue division will become effective in the 2009 fiscal year.

Some provinces had demanded a much more significant share of oil and gas revenue.

The new law also gives provinces a larger portion of general allocation funds. The regions currently receive a minimum of 25% of the annual state budget's domestic revenue, while the new law raises the minimum level to 26%, beginning in 2008.

Another source of financing for the regions is bonds, which provinces will be allowed to issue after getting approval from local House members and the Minister of Finance.

BUSINESS BRIEFS

MACROECONOMY

Inflation Slows Further

Inflation continued to slow in September, as gains in food prices moderated, Reuters reported. The consumer price index rose 6.27% in the year through September, slowing from 6.67% in the year through August, the Central Bureau of Statistics (BPS) stated.

Analysts said slowing inflation would remove pressure on Bank Indonesia to increase interest rates.

A successful rice harvest boosted food supplies, easing pressure on prices. The food sector has the largest weighting in the CPI at 25%.

Food prices fell by 1.36% while processed food, beverage and tobacco were up 0.18%. Education, recreation and sports prices were up 2.02% in September.

For the first nine months of this year, the inflation rate was 3.8%, much lower than the government's revised full-year forecast of 7%.

Exports Move Forward

Indonesia’s export performance continued to improve, but there were signs of a slowdown in some commodity sales, possibly because of increasing wariness in the United States as oil prices peak.

The Central Statistics Bureau (BPS) said Friday (1/10/04) that exports reached $5.91 billion in August, a 4.15% increase from the previous month and a 17.66% rise from the same month last year, The Jakarta Post reported.

Non-oil and gas exports rose 3.42% to $4.60 billion month-on-month, with ores, slags, and metal ashes recording the largest jump, reaching a combined value of $209.2 million from $92.1 million in July.

Oil and gas exports were up by 6.79% to $1.31 billion on higher global oil prices. Export volume declined by 10.26%.

Exports in the January-August period totaled $43.09 billion, a 5.75% increase from the same period last year.

BPS also reported that exports to the US market dropped by 63.1% in August to $710 million, although it remained Indonesia's second largest export market after Japan. The other major destinations were Singapore and China.

Imports jumped by 49% in August to $4.02 billion from $2.70 billion in the same month last year, but were down 2.2% from $4.11 billion in July.

The trade surplus increased slightly to $1.89 billion from $1.57 billion in July.

Bond Issue Oversubscribed

The Indonesian government issued Rp3.75 trillion ($405 million) worth of 10-year bonds at a weighted average yield of 11.21% on Tuesday (28/9/04).

The yield was in line with market expectations but the size was larger than the government's initial target of Rp2.5 trillion. Total bids of Rp7.13 trillion were received, the ministry said in a press release.

The government last month issued Rp3 trillion in 10-year bonds at a weighted average yield of 11.74%.

Coordinating Minister for the Economy Dorodjatun Kuntjoro-Jakti said the high demand for the bond and the lower weighted average yield showed high investor confidence in the country.

"The treasury bonds are still oversubscribed by three times and the yield is low, even as oil prices are rising and most Asian stock markets are down," he told reporters. "We still have their (investors') confidence," Dorodjatun said.

Tuesday's issue brings the total domestic bonds issue this year to Rp17.7 trillion. The government has targeted a total of Rp23 trillion worth of rupiah-denominated bonds this year to help finance the 2004 state budget deficit. The next bond issue is scheduled for October 26.

Debt Sustainable: IMF

Indonesia's public debt burden remains sustainable, and the country does not need to seek debt rescheduling, the International Monetary Fund (IMF) said Wednesday (29/9/04), Dow Jones Newswires reported.

"Any new government would like to have more resources it can allocate for other projects, but the debt burden seems to remain sustainable over the medium term," IMF representative in Indonesia Stephen Schwartz said at a business seminar.

The current government has reduced the level of public debt to around 60% of gross domestic product from its peak in 2000, when it was equivalent to the country's entire GDP.

Next year, the government must pay around $5.1 billion in offshore debt, or around 12% of the total expenditure targeted in next year's state budget.

Forex Reserves Up

Foreign exchange reserves in the third week of September 2004 stood at $34.83 billion, up $260.20 million from the previous week. Bank Indonesia said the increase was the result of oil and gas sales.

Primary money on September 23, 2004 amounted to Rp169.93 trillion, a Rp3.24 trillion decline compared to the amount on September 15, 2004, due to seasonal factors.

SOEs

Merpati Rescue Plan Approved

The House of Representatives has approved the government’s plan to restructure state-owned airline PT Merpati Nusantara Airlines in a bid to save it from collapse, The Jakarta Post reported.

The program consists of debt restructuring, strategic sale to foreign or local investors, and an initial public offering (IPO).

The House postponed the divestment program for state-owned Bank Negara Indonesia (BNI), saying it should be left to the incoming House and the government.

House finance commission chairman Emir Moeis said Monday (27/9/04) that the Ministry of Finance would have to first approve Merpati's business plan before the restructuring programs could be carried out.

Merpati's management should first complete the conversion of the company's debt to the government into equity, officials said.

Merpati has Rp1.3 trillion ($139.93 million) in debt and assets amounting to about Rp775 billion. The airline's major creditors are the government (Rp225 billion), Bank Mandiri (Rp230 billion) and national flag carrier Garuda Indonesia (Rp246 billion).

Bank Jabar Bonds Oversubscribed

The Rp1 trillion ($111 million) bonds issued by PT Bank Jabar were oversubscribed 2.5 times, Antara reported.

Lead underwriter PT Mandiri Sekuritas said demand for the bonds reached Rp2.5 trillion after the closing of the public offering.

The bonds consist of 3-year Series A amounting to Rp300 billion with an annual fixed rate of 11.75% and 5-year Series B amounting to Rp700 billion carrying an annual coupon rate of 12.5%.

Indonesian rating company PT Pemeringkat Efek Indonesia gave the bonds the rating of BBB+. The funds are to be used for credit expansion.

STATE CONCERNS

Changes to Social Security Bill

A much-altered bill on social security was passed by parliament on Wednesday (29/9/04), without clauses that would have liquidated existing social security agencies including PT Jamsostek and PT Askes.

"The legislation will function as an umbrella law for all laws that regulate state-owned social security firms and their existing programs," special committee chairman Surya Chandra Surapaty said after the committee's last session, according to The Jakarta Post.

Both employers and labor unions have opposed the legislation, but employers’ associations were happy with the final version.

The bill includes an article on the establishment of a non-profit agency to manage funds from all social security companies. The agency will be responsible directly to the president.

The five companies that currently operate social security programs will no longer be obliged to pay taxes and dividends to the government, and their annual profits will be added to their assets to help improve subscribers' welfare.

Highway Bill Passes

The House of Representatives Wednesday (29/9/04) endorsed a key bill on road development seen as pro-investment, forcing landowners to surrender land needed for roads at government-determined prices, The Jakarta Post reported.

Minister of Settlements and Regional Infrastructure Soenarno said the bill was designed to open the toll road sector to private investors, while eliminating barriers that often surfaced during the construction phase of toll roads.

Articles 59, 60 and 61 of the bill reduce the power of landowners whose property stands in the way of a road project. Many toll roads, including the Jakarta Outer Ring Road, have been blocked by landowners hanging out for unreasonable prices and, in many cases, speculators have acerbated the problem.

The articles will allow land disputes to be resolved in court while a construction project continues, while article 62 allows for landowners to file complaints with the courts demanding reasonable compensation.

The bill also separates the functions of the current regulator and operator, PT Jasa Marga. It requires the establishment of an agency called the Toll Road Regulator Agency (BPJT) tasked with regulating and supervising the toll road sector under Soenarno’s ministry.

Five Jailed for BNI Fraud

A court sentenced five directors of a business group on Thursday to between eight and 15 years in prison for a multi-million-dollar fraud at Bank Negara Indonesia (BNI), Agence France-Presse reported.

Judges at the South Jakarta District Court found the five --who head companies under the Gramarindo Group - guilty of defrauding of Rp728 billion ($79.5 million).

Ollah Abdullah Agam, Aprilla Widata and Adrian Pandelaki Waworuntu each received 15-year jail terms while Richard Kuontul was jailed for 10 years. Titik Pristiwati was sentenced to eight years in jail.

BNI channeled a total of Rp1 trillion to the group in 2002 for supposed export transactions to Congo and Kenya, which were later found to be fictitious. In August the same court sentenced BNI executive Edi Santoso to life in prison for his role in the scam.

Another suspect, Maria Pauline Lumowa, has fled to Singapore. AFP noted that Singapore has repeatedly refused to sign extradition treaty with Indonesia “for unclear reasons”.

Bill on Migrant Workers Passes

Parliament passed Monday (27/9/04) a bill on migrant workers protection, despite complaints that it is more exploitative than protective, The Jakarta Post reported.

The bill's endorsement was highlighted by a protest by labor activists, who say it does not define how migrant workers should be protected either before they leave for overseas or during their employment in a foreign country.

"(The bill) mentions labor protection, but it does not regulate how workers should be protected," said Salma Safitri, coordinator of Solidarity for Women (SP).

Nuwa Wea said the legislation regulated standard recruitment procedures, labor contracts and legal protection during employment, similar to the Philippines' migrant workers law.

Closer Trade Ties with Saudi

Indonesia and Saudi Arabia plan to double their bilateral trade in non- oil and gas commodities to $1 billion next year, Minister of Industry and Trade Rini M.S. Soewandi said Friday (1/10/04), The Jakarta Post reported.

She said the two countries had agreed to boost trade at meetings in the Saudi capital of Riyadh earlier in the week.

"Saudi's minister of commerce and industry expressed his country's intention to improve the two nations' trade ties," the minister told reporters after the opening ceremony of the new National Agency for Export Development (NAFED) building.

The two countries had also agreed to look at the establishment of at least three joint ventures between Saudi and Indonesian businessmen, focusing initially on garment manufacturing and food processing. Saudi Arabia was also interested in investing in the Indonesian resort sector, Soewandi said.

The Saudi government also promised to provide easier market access in recognition of Indonesia's promise to support Saudi's bid to join the World Trade Organization.

PRIVATE SECTOR

Market Hits New High

Indonesian shares ended at a record high Monday on continued foreign buying amid expectations that President-elect Susilo Bambang Yudhoyono will form a market-friendly cabinet to fix the nation's economy, dealers said.

They added that gains across Asian markets after Wall Street's rally Friday and expectations that the central bank won't raise interest rates after September's softer inflation report also spurred buying.

"I think the main index is on track to exceed the 900 level by the end of the year," said Mohammad Reza, head of research department at Kuo Capital Securities.

The Jakarta Stock Exchange Composite index rose 20.544 points, or 2.5%, to
hit an all-time closing high of 856.449.

Retail Sales Increase

Domestic retail sales grew 1.2% month-on-month in July after falling 2.1% and 2.7% in June and May, according to a Bank Indonesia retail survey, AFX-Asia reported. The central bank said the survey also indicated retail sales to have grown 0.4% in August.

Clothing sales rose 7.5%, household appliances were up 2.1%, construction materials up 4.2%, arts and toys up 5.7%.

The increase in sales of construction materials and food, beverage and tobacco mainly occurred in Jakarta while a sharp rise in household appliances occurred in Bandung, West Java.

Bank Niaga Eyes Credits Increase

Bank Niaga is targeting an expansion of credit of Rp5 trillion ($544 million) in the remainder of the year, president director Peter B. Stock said Monday (27/9/04), Antara reported.

"By the end of this year, credits issued by Bank Niaga are expected to reach a total of some Rp19 trillion, or up by about Rp4.5 to Rp5 trillion compared to Rp14.5 trillion in 2003," he said.

Stock was talking on the sidelines of a ceremony to introduce a shariah banking service. He said the shariah banking division was part of the bank’s program to become one of the country’s five largest banks by 2007.

Telkomsel Boosts Infrastructure

The country’s largest cellular phone operator, PT Telkomsel, will speed up the building of 79 new base transceiver stations ahead of the Idul Fitri holiday in mid-November in expectation of a boost in usage, Antara reported.

The new stations will take the company’s total base stations to 529, company spokesman Agus Setyabudi said, adding that Telkomsel planned to built another 400 units in 2005.

HK Investor Builds Luxury Estate

Hong Kong investor PT Gazelle Worldwide Inc is developing an exclusive housing complex at Bukit Sentul near Bogor, south of the capital Jakarta, Antara reported.

PT Gazzelle Indonesia director, Suwondo, said the "Beverly Hill Side Resort Residence", built on 70 hectares of land, will be the first exclusive housing complex in the country. The project is expected to be completed by September next year.

Suwondo said prospects in Indonesia’s property business were encouraging.

Lion Air to Add Aircraft

Budget airline Lion Air said it will increase the number of its aircraft by 15 by the middle of next year to serve domestic and regional flights, Antara reported.

The aircraft will be composed of 10 units of Boeing 737-400 and five units of MD-90 produced in 2000, spokesman Hasyim Arsal Alhabsi said. The acquisitions will take the Lion fleet to 40 aircraft. Alhabsi said some of the new aircraft will be used to boost flights to eastern Indonesia.

PC Sales Increase

Sales of personal computers in including desktops, printers and notebooks reached 350,000 units valued at about US$350 million in the third quarter of this year, the Association of Computer Traders (Apkomindo) said, according to Antara.

Apkomindo chairman Hidayat Tjorkodjojo said sales in the third quarter represented a sharp increase from 250,000 units in the second quarter.

POWER

PLN to Diversify Energy Sources

State-run power utility PT Perusahaan Listrik Negara (PLN) said it is trying to boost the use of non-fuel energy sources in an effort to minimize power tariff increases, Bisnis Indonesia reported.

"We must secure the substitutions to fuel such as coal or gas. If we keep using fuel, it (tariff increase) will be huge," Bisnis quoted PLN president Eddie Widiono as saying.

He said PLN's production costs amounted to around Rp60 trillion per annum, of which Rp25 trillion was spent on energy, with fuel costs amounting to Rp15 trillion of the energy costs.

PLN is currently accelerating construction of its coal-fired Cilegon power plant and the steam-fired Cilacap plant. Both projects are expected to come on stream next year.

He said the company will save up to Rp8 trillion if gas prices remain stable next year and fuel use is reduced significantly.

Widiono said PLN hoped to hold power rate increases down by reducing fuel costs. Power prices have not risen since the third quarter of 1003, with the government canceling further planned rises, saying the rate was already commercially viable.

INCO to Build Hydro Plant

South Sulawesi-based nickel miner PT International Nickel Indonesia (INCO) will invest $125 million to build a third hydro-power plant, Bisnis Indonesia reported, quoting company representative Ruslan Muhadi.

The hydro-power plant, which will raise nickel output to 200 million pounds from 155 million last year, will have a capacity of 90 megawatts.

"We hope that, once the project is completed, INCO's production will reach 200 million pounds," Ruslan said. INCO's nickel output target this year is 160 million pounds.

INCO's first two hydro-power plants have a capacity of 165MW and 110MW.

OIL & GAS

House OKs Extra Fuel Subsidy

The House of Representatives (DPR) endorsed Tuesday (28/9/04) increases in fuel subsidies as part of revision of the 2004 state budget law, The Jakarta Post reported. The passage came despite resistance from the Reform faction, which opposed the blow-out in the subsidy bill.

The revisions boosted fuel subsidy payments to Rp59.2 trillion ($6.43 billion), plus Rp3.6 trillion in extra funds should the next government decline to raise fuel prices latter this year, as the DPR has recommended.

In total, the state budget allocates some Rp63 trillion to cover fuel subsidies for 2004 as international oil prices soar, forcing the government to increase the average oil price assumption in the budget to $36 per barrel from the original figure of $22.

The Reform faction said the high subsidy payments were a drain on the state budget, a source of injustice, since most subsidies are enjoyed by the rich, and an invitation to smuggling.

A recent study by the University of Indonesia’s Institute for Economic and Social Research (LPEM-UI) said those who are economically well-off consume 8.2 times as much premium gasoline as the poor. In the case of automotive diesel oil, consumption by the well-off is 99.4 times higher than that by the poor.

Biodiesel Fuel Tests

The Agency for the Assessment and Application of Technology (BPPT) has begun tests on the use of palm-oil-based biodiesel on 23 buses used by its employees, Antara reported.

Dozens of minibuses also left Monday (27/9/04) on the B10 Java-Bali Biodiesel Road Test, using a mixture of 10% biodiesel and 90% diesel fuel.

"Indonesia consumes 16 million kiloliters of diesel annually. We can save up to 1.6 million kiloliters if we can make all diesel-powered vehicles use the biodiesel mixture," Research and Technology Minister Hatta Rajasa said.

He said biodiesel was not only cleaner but also cheaper, and kept engines in better condition.

Biodiesel can be made of coconut, jarak seed (ricimus communis), kapok seed (Ceiba pentandra), palm oil and soybean. Hatta added that there were some 40 plants in Indonesia that could be developed into biodiesel.

INTERVIEW: New Indonesia Government to Press on Cutting Deficit

JAKARTA, Oct. 4 (Dow Jones)--Indonesian President-elect Susilo Bambang Yudhoyono will continue the efforts of the current government to reduce the state budget deficit and will aim to eliminate investment barriers to create more jobs, his chief economic adviser said Monday.

"I think reducing the deficit in the state budget is a good thing, especially because it's in the framework of keeping monetary stability," Irzan Tanjung said in an interview with Dow Jones Newswires. "Such policy should be continued."

The current administration of President Megawati Sukarnoputri is credited with bringing down the budget deficit to an expected 1.3% of gross domestic product this year from 2.8% in 2001.

Yudhoyono is slated to take over Oct 20. when he will be sworn in as the country's new head of state, following a landslide victory in the country's first direct presidential election last month. Observers and analysts have said the new government should continue to implement the previous administration's prudent fiscal policies and avoid any reckless spending.

Irzan, a retired economics professor, said that the next government will reduce fuel subsidies and take other measures so that the government will have more money for infrastructure projects.

One of the challenges that the next government will face is boosting foreign direct investment to help create jobs for around 40 million underemployed, Irzan said.

"The next government must make investors confident in the country's legal system, social and political situations, so that they will feel safe to invest their money here," he said.

Foreign investors have been reluctant to invest in Indonesia because of legal uncertainties and rampant corruption. Approvals for foreign direct investment fell 30% in the first eight months of the year to $3.8 billion from the same period in 2003, according to the government data.

Irzan said Yudhoyono's government will review regulations that continue to keep investors from coming to Indonesia, such as taxes imposed on oil and gas companies doing exploration.

"There must be special treatment (for oil and gas companies) during the exploration period," he said.

Indonesia, the only Asian member of the Organization of Petroleum Exporting Countries, became a net crude oil importer early this year for the first time because oil reserves after dwindled after years of production and little new exploration.

Irzan, who graduated from the University of Illinois in 1987 and served as deputy to the Coordinating Minister for Economy, Finance and Industry from 1988 to 1997, said Yudhoyono's government will work with the International Monetary Fund to push through economic reform.

Indonesia graduated from an IMF economic bailout program at the end of last year, but the country is still in close consultation with the fund while its completes repayment of the loans disbursed during the program to support its balance of payments.

Irzan said the new government won't seek debt write-offs from international lenders, although it will explore with them ways to reduce Indonesia's debt repayment burden.

"We will not act recklessly, we are a responsible government," he said.

Official donors grouped under the Paris Club have agreed to reschedule Indonesia's debt several times since the 1997-98 Asian financial crisis. But the country is no longer eligible for such rescheduling after it graduated from the IMF's bailout program at the end of last year.

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Source: The Coordinating Ministry for Economic Affairs Republic of Indonesia