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THE COORDINATING MINISTRY FOR ECONOMIC AFFAIRS
REPUBLIC OF INDONESIA
NEWS ON TRADE AND INVESTMENT IN INDONESIA
23 August 2004
ECONOMY
Economy Grew by 4.66 percent in the first half 2004
Indonesia's second quarter gross domestic product (GDP) rose 4.32%
year-on-year, slower than the revised 5.01% growth of the previous
quarter, Central Bureau of Statistics (BPS) head Choiril Maksum said,
according to AFX-Asia. He also reported that GDP expanded by 4.66
percent in the first half of the year compared to the same period
of last year.
Rising inflationary pressures during the past three months due to
weakening of the rupiah (the local unit has declined by nearly 10
percent against the dollar) reduced
consumer spending as purchasing power weakened. Inflation hit a 15-month
high
of 7.2 percent in July, higher than the government's annual rate target
of 6.5 percent, due to soaring prices of food and other basic commodities.
Domestic consumption has been the main engine of economic growth during
the past few years, accounting more than 68 percent of gross domestic
product (GDP).
Growth in consumers spending increased by 5.3 percent in the second
quarter, while
Government spending expanded by 6.1 percent. Gross Fixed Capital Formation
or Investment spending shows an encouraging growth of 9.3 percent,
while Exports and Imports grew by 3.1 percent and 9.0 percent respectively.
BUSINESS BRIEFS
MACROECONOMY
Tax Target Set for 2005
The government has set a target for 2005 revenue from taxes of Rp297.5
trillion ($32 billion), a rise of Rp25.3 trillion or 9.3% from this
year’s target of Rp272.2 trillion, Antara reported. The figure
was announced by President Megawati Sukarnoputri in her address to
the House of Representatives on Monday (16/8/04).
The target was set based on the possible potential loss of tax revenue
following implementation of the amended law on personal income tax
(PPh), value added tax (PPN) and the general rules on taxation. The
amended tax law is expected to be implemented in 2005.
Tax revenue from PPh was set at Rp141.9 trillion, up by Rp7.5 trillion.
Revenue from non-oil/nongas PPh was set at Rp13.6 trillion or up by
Rp500 billion from the figure in the 2004 state budget.
Revenue from PPN and PPnBM was set to reach Rp98.8 trillion or up
by Rp12.5 trillion from the target in the 2004 state budget of Rp86.3
trillion.
SBI Rate Flat
Bank Indonesia maintained a rate of 7.37% at the auction Wednesday
(18/8/04) of one-month Sertifikat Bank Indonesia (SBI), Reuters reported.
The agency said the SBI rate is likely to increase interest in the
coming release of Rp2 trillion in treasury bonds next week (24/8/04).
Dealers said the SBI auction results may signal the central bank's
optimism that ample liquidity in the banking system would be able
to help mitigate any upward pressure on SBI rates arising from worries
over higher inflation.
The central bank was able to absorb Rp43.7 trillion ($4.7 billion)
from the SBI auction, about Rp4 trillion higher than the maturing
amount this week, while keeping the absorption rate at a high of 95%.
The government plans to issue Rp50 trillion ($5.55 billion) in bonds
next year.
Forex Reserves
Bank Indonesia said its foreign exchange reserves rose slightly to
$34.97 billion as of August 13 from $34.80 billion a week earlier,
mainly due to revenue inflow from the oil and gas sector.
Base money as of August 13 fell by Rp2.47 trillion to Rp170.53 trillion
as money in circulation and banks' reserves at the central bank declined.
STATE CONCERNS
Life for BNI Fraud
The South Jakarta district court handed a life sentence to a state
bank official in the heaviest sanction given so far for a bank fraud
case, Antara reported. The court also fined former Bank Negara Indonesia
(BNI) executive Edi Santoso Rp1 billion rupiah ($108,108) for fraud
involving Rp135.91 billion. He was the head of customer service of
a branch office in south Jakarta.
The branch office's head was jailed for 16 years and fined Rp500 million
for his involvement in the fraud. The two were found guilty of corruption
by defrauding the state by issuing funds for fictitious export credits.
Both defendants said they would appeal.
Regional Alliance Sought on Logging
The government is to seek cooperation with countries in the region
to eliminate illegal logging, prevent environmental pollution and
expand conservation of natural forests, Antara reported.
Indonesia will raise the issues at a meeting of the Asia Forest Partnership
(AFP) in Yogyakarta from August 30 to September 1.
Indonesian logs are still being found in Asian and European markets
despite a log export ban issued in 2001, said Transtoto Handadhari,
head of the Information Center of the Forestry Ministry, Forestry
Minister M. Prakosa will discuss with Japan’s delegation reports
that the country would boycott Indonesian plywood allegedly produced
from natural forests. A similar threat from Britain was later withdrawn
after Prakosa explained that not all plywood from Indonesia was produced
from natural forests.
PRIVATE SECTOR
Business Activity Increases
Business activity in the second quarter of the year was higher in
the second half of 2004 as companies reported stronger earnings, increased
capacity utilization and higher productivity, the Central Bureau of
Statistics (BPS) said, according to AFX-Asia.
BPS said its business tendency index stood at well over 100 for companies
surveyed. An index reading of above 100 shows an improvement in business
activity.
The index for companies surveyed within greater Jakarta was 117.79.
The index was 114.35 for the area around greater Jakarta, and elsewhere
in Indonesia the figure was 114.81.
All three variables that make up the index -- earnings, production
capacity and productivity -- contributed to the rise, it said.
The BPS consumer tendency index for the second quarter stood at 118.03,
also higher than the previous quarter. The index showed improvement
in all of its three variables -- household income, the impact of inflation
on food, and the level of consumption of basic commodities such as
clothing and recreation.
INFRASTRUCTURE
New Port for North Sulawesi
South Korean investor Korea Mighty & Science International (KMSI)
plans to invest $700 million in an international hub port (IHP) at
Amurang, in the regency of Minahasa Selatan, North Sulawesi, Antara
reported.
President of KMSI Lee Hyun Woo told reporters in the North Sulawesi
capital of Manado on Monday (16/8/04) that Amurang was considered
a better site for a major port than Bitung, which has been the preferred
development site until now.
The first phase of development to start next month includes construction
of a 2,100 meter quay on a 77 hectare plot of land.
JBIC Loan for Jakarta MRT
The Japan Bank for International Cooperation (JBIC) has agreed to
a loan of $767.66 million to finance the contraction of the Jakarta
Mass Rapid Transport System (MRT), Antara reported.
The loan will be used for the first phase of the railroad project
between Lebak Bulus and Dukuh Atas, said Harris Fabillah, director
of rail transport at the Communications Ministry.
The project involves both elevated and underground sections and will
be carried out in two phases. The first phase covering 13.6 kilometers
will start next year and be completed in 2010.
The loan from JBIC will carry annual interest of 0.95% and will be
repayable in 40 years including a grace period of 10 years.
Rail Links for Tanjung Priok
The Communications Ministry and the Ministry for Resettlement and
Area Infrastructure plan to build rail lines to link with a number
of quays at Jakarta’s Tanjung Priok port, Antara reported.
Chief of the ministry’s planning bureau, Dedi Dharmawan, said
state railway company PT Kereta Api, the Jakarta city administration
and state-owned port operator PT Pelabuhan II will also be involved
in the project.
The project is being studied by the institutions involved, he said,
adding that toll roads are likely to be included in the plan. Construction
of the rail links was expected to start later this year, with loan
funds from the Japanese government.
INVESTMENT
Saudi Interest in Cotton
A Saudi Arabian investor has expressed interest in opening a 10,000-hectare
cotton plantation in Kaur district in Bengkulu province, district
head Saukani Saleh said Wednesday (18/8/04), Antara reported.
The businessman, who was not named, will invest Rp250 billion ($26.9
million) in the plantation, which could employ at least 10,000 farmers,
Saukani said, adding that it was the first time there had been interest
in cotton growing in the province.
SOEs
Permata Bid Deadline Extended
The government has extended the deadline for bids for a 51% stake
in Bank Permata by four days to August 27, Reuters reported. Asset
disposal agency PT Perusahaan Pengelola Aset (PPA) said in a statement
Friday (20/8/04) that the due date for submission of requests for
qualification for bids for the country's seventh-largest bank had
been extended from August 23.
On Thursday, an official said 27 investors had already submitted such
expressions of interest, and five to six of those had managed to get
through an initial selection process.
The statement said prospective investors had requested the delay.
Among potential bidders who have already moved through the initial
selection process are London-based Standard Chartered Plc., Singapore's
third-ranked United Overseas Bank Ltd. (UOB), and leading Malaysian
bank, Malayan Banking Bhd.
PPA controls 97% of Permata. After the sale of the 51% stake, another
20% is expected to be sold on the market. PPA hopes the 51% stake
will sell for at least 1.8 times 2003 book value, or around Rp1.6
trillion ($173 million).
PPA is expected to name between three and five short-listed bidders
for the 51% stake early next month, PPA vice president Raden Pardede
said Thursday (19/8/04), The Jakarta Post reported.
PPA would need to consult the Minister of Finance on the bidders,
he said.
BNI Triples 1H Net Profit
PT Bank Negara Indonesia said Friday (20/8/04) its first-half net
profit for 2004 more than tripled due mainly to growth of net interest
income, Dow Jones Newswires reported.
Net profit rose to Rp1.5 trillion from Rp408.80 billion a year earlier.
The nation's third-largest bank in terms of assets said net interest
income rose 50% on year to Rp3.3 trillion due to an increase in lending.
At end-March, outstanding loans stood at Rp50.93 trillion, up 20%
from Rp42.38 trillion a year earlier.
BNI also attributed the higher net profit to the lower loan loss provision
during the first half. During the period the bank provided Rp1.13
trillion in loan loss provision, compared with Rp1.83 trillion during
the same period last year. The higher loan loss reserve last year
was used to cover fraud of Rp1.7 trillion.
As of June 30, assets were at Rp128.62 trillion, up from Rp125.34
trillion a year earlier, while the capital adequacy ratio (CAR) stood
at 19.88%, compared with 18.12% in the same period last year.
Mandiri Expects Strong 1H Profit
State-owned PT Bank Mandiri expects first-half net profit to rise
by 35% on year due an increase in new lending, Dow Jones Newswires
reported. "We expect first-half net profit to hit Rp3 trillion,"
president E.C.W. Neloe told reporters Thursday (19/8/04).
Mandiri posted a net profit of Rp2.23 trillion in the first six months
of 2003. Neloe said the bank's new lending during the period is expected
to amount to Rp1.7 trillion, bringing its outstanding loans to Rp77.6
trillion at end-June.
The government, which currently holds a 70% stake in the bank, said
it may delay the sale of a further 10% stake in Bank Mandiri until
next year due to the current poor conditions in financial markets.
Private-State Cooperation in Airports
Private companies wanting to operate airports must cooperate with
state-owned firms, Director General of Air Transportation Cucuk Suryo
Suprojo told reporters Thursday (19/8/04), Antara reported.
He said airports were closely linked to state infrastructure and international
treaties and it was inappropriate for private companies to operate
them alone. He said several private companies had expressed interest
in operating a number of airports.
New Satellite for Telkom
PT Telekomunikasi Indonesia (Telkom) plans to launch a new satellite
with broader coverage in December, The Jakarta Post reported. Telkom-2
will replace Telkom's Palapa B4 satellite and provide 24 transponders
with a lifespan of 15 years.
Telkom will spend $170 million on the construction of the satellite
and its launch by Arianespace from Korou in Guyana, South America.
The satellite will be in full operation by February 2005 and serve
an area including India and China, compared to the Palapa B’s
coverage of only Southeast Asia. Funds for the satellite will come
from Telkom’s cash reserves, company president Kristiono said
Thursday (19/8/04).
Telkom also operates Telkom-1, launched in 1999 with 36 transponders
and a life of 15 years. The majority of the transponders are used
by Telkom, with some being used by operators of VSAT systems and television
stations, as well as some major news agencies.
Telkom is currently the second-ranked satellite provider in Southeast
Asia after AsiaSat, with 17% of the market.
TRADE
Export Expansion on Target
Industry and Trade Minister Rini M. S. Soewandi says the country is
on track to meet its exports target of 7% growth this year. The minister
added that the government would aim for 10% growth next year, The
Jakarta Post reported. Non-oil and gas Exports grew by 5.18% last
year to $47.41 billion. Soewandi said improved security and an expanding
global economy promised stronger growth.
Strong growth was expected in the fisheries and agriculture sectors,
Soewandi told a press luncheon, and there were hopes that textiles
and garments, footwear and electronics and components could also post
gains. She said her Ministry had urged Bank Indonesia (BI) to relax
restrictions on loans to the textile and garment sector, despite the
average 10% of loans to the sector that are classified as non-performing,
above the bank’s level of 5% required for an industry to be
declared ‘healthy’.
"BI said it understood that not all players in the textile industry
are indebted and agreed to review the policy and encourage private
banks to examine the creditworthiness of individual clients,"
she said. Industry associations and major banks would meet next week
to discuss an expansion of credit to the sector.
The drive to boost lending to the textile and garment sector recognizes
the need for
modernization. With the removal of the quota system for exports to
Europe and the US next year, Indonesia’s industry is expected
to face strong competition to lower cost producer countries.
Benny Soetrisno, chairman of the Indonesian Textile Association (API)
acknowledged that at least 400,000 of the 1.2 million workers in the
sector will lose their jobs.
POWER
Way Out on Karaha Bodas
Newly appointed president of state oil and gas firm PT Pertamina,
Widya Purnama, said Wednesday (18/8/04) the company would not pay
damages to US-based energy firm Karaha Bodas Company (KBC) as ruled
by an international arbitration court because of alleged corruption
in KBC’s local power project.
"Pertamina will not pay ... because the project has inflicted
losses to the state and to the
company," Widya briefed the press. The International Arbitration
Court in Geneva ruled that Pertamina must pay damages of $299 million,
including accrued interest, to KBC after the government suspended
the company's power project in the wake of the late 1990s financial
crisis.
Widya said there was evidence of corruption in KBC's power project,
as indicated in a 1999 report from the Development Finance Comptroller,
which showed a mark-up of $19.16 million in the project's investment
cost.
An independent appraisal also showed the project was worth only $50
million, while the KBC claimed it had invested $110 million, Widya
said, adding that the company expected the police to speed up investigations
into the alleged graft in the project.
The police have questioned several officials from Pertamina and KBC
with respect to the awarding of the contract, and have charged three
suspects thus far for fictitious transactions and mark-ups. "If
the investigation uncovers corruption in the project, it will serve
as new evidence in the appeal to the US Supreme Court to annul the
(arbitration court's) ruling," Widya said.
MINING
Newmont to Cease Mining
Gold mining firm PT Newmont Minahasa Raya (NMR) will suspend its operations
in Minahasa, North Sulawesi totally by the end of August, a company
executive said Tuesday (17/8/04).
In a press release, NMR executive director Rick Ness said after the
suspension his company would carry out an environmental management
process for five weeks. ”This is in accordance with the firm's
2004 working plan and reflects its care for the environment,"
he said.
NMR has been operating in Mesel, Ratatotok subdistrict, South Minahasa
district, North Sulawesi, since 1996 after the government approved
its environmental impact analysis. But it stopped its mining activity
in October 2001 because the gold deposits in the ground were depleted.
Since then Newmont's activity was limited to processing the last gold
ore stocks.
The firm produced 1.9 million ounces of gold and had paid taxes and
royalties to the Indonesian government amounting to $104.12 million.
Meanwhile, preliminary results of an investigation conducted by the
Indonesian police's forensic laboratory center showed that Buyat Bay
in North Sulawesi where the firm’s mine is situated is contaminated
above the normal level by heavy metals.
Speaking to the press Friday (August 13), chief of the National Police's
detective and criminal unit, Commissioner General Suyitno Landung,
asked PT Newmont and people living near the bay to temporarily stop
mining gold.
"The National Police Headquarters will soon instruct chief of
the North Sulawesi provincial police to stop gold mining activities
carried out by Newmont and Ratatotok (residents) to prevent the contamination
from spreading further and affecting human health," he said.
The preliminary results of the research were based on samples of water,
biota and sediment layers taken from a number of points in the bay,
he said. National Police chief Gen. Dai Bachtiar said Friday (20/8/04)
that the government had agreed to form a joint team involving the
Ministry of Health, the Ministry of the Environment, the National
Police and several NGOs to conduct laboratory tests on samples taken
from Buyat Bay.
"As a result of the meeting at the Office of the Coordinating
Minister of People's Welfare, we decided to wait for the results of
a joint team's investigation because during the meeting different
results from other ministries emerged," said Da'i.
He said the police would use their own test results as the main material
for the dossier and that the joint team's test results would be used
only as additional proof.
OIL & GAS
Petronas Inks Partnership
Malaysian oil firm Petronas said Wednesday (18/8/04) it has tied up
with PLN to develop a liquefied natural gas (LNG) regasification terminal
in West Java.
The terms of the memorandum of understanding (MOU) include plans
for the two parties to undertake a joint study for the proposed development
of the West Java regasification terminal project, Petronas said in
a statement. Petronas said the terminal would initially have a capacity
of 400 million cubic feet per day, and this will eventually build
up to 800 million cubic feet a day and expected to be operational
in 2007.
What the World Said about Indonesia
Financial Times
August 16, 2004
A Quiet Optimism Returns to Indonesia
By Shawn Donnan
When the combined effects of the Asian financial crisis and political
upheaval ripped
through Indonesia and its capital markets in 1998 the reaction from
many of the world's
big investment houses was predictable.
They quickly went into downsizing mode. Whole trading divisions were
slashed or
farmed out to local partners. Investment bankers and analysts packed
up and moved to
Singapore and Hong Kong.
Left behind were diminutive offices with rapidly growing expertise
in how the
Indonesian judicial system could help local tycoons evade billions
in dollar-denominated
debts.
But six years on with the September 20 finale of the country's first
direct presidential
election looming the mood is markedly different. For the first time
since the crisis,
Jakarta's investment community is growing.
International investment houses such as CLSA, CSFB, Deutsche Bank
and UBS are
quietly expanding their operations in Jakarta. For those of their
staff who weathered the
financial crisis and previous upturns in sentiment, this change has
a unique flavour.
"It feels a lot different this time," says Sarah-Jane Wagg,
head of Indonesian equities for
UBS and a nine-year veteran of the Jakarta financial market. "For
the first time in a while we're seeing direct equity investors coming
and taking a look around."
The current reality is also that, while private consumption-driven
growth is forecast to hit almost 5 per cent this year, Indonesia continues
to suffer from disinvestment by foreign directinvestors.
Plunges in both the rupiah and the Jakarta Stock Exchange's main index
earlier this year, after an 18-month rally driven by interest from
emerging market funds, also served as a reminder of the continuing
vulnerability of Indonesian markets.
There is a growing expectation, however, that with elections proceeding
peacefully and
the picture improving slowly in the fight against age-old problems
such as corruption and legal uncertainty, Indonesia is on the cusp
of regaining at least some of the direct
investment it so badly needs to spur economic growth.
While foreign direct investment approvals were down 35 per cent in
the first half of this
year, there are signs of a recovery in domestic investment. According
to Rizal Prasetijo,
head of research for JP Morgan in Jakarta, Indonesian banks' corporate
loan books were up 18 per cent in the first half of the year while
cement sales were up 9 per cent.
Within a year, says Michael Chambers, CLSA's head of research in Jakarta,
the Indonesian market should see a growing number of initial public
offerings, new share issues by established groups and the introduction
to the market of vehicles such as real estate investment trusts and
infrastructure funds.
Within one to two years, he argues, Indonesia's stock market should
be returning to the
$200m-$250m daily volumes it saw pre-crisis, up from the $120m volumes
seen during
the first seven months of this year and just $50m-$60m a year ago.
"It may be a year or two away. But even at $100m there's room
for quite a few brokers here," says Mr Chambers.
The scramble for trading commissions is prompting a bidding war for
local talent.
Deutsche Bank has recently re-entered the Indonesian equities market
for the first time
since 1998 by poaching UBS's local research team and deploying them
in a joint venture.
But a marked upturn in stock market volumes still depends on foreign
institutional
investors finding the kind of investment story that drove the pre-crisis
market, analysts
say.
One of the main elements of the story will have to be an upturn in
economic growth,
which depends on the translation of what are now vague election promises
into renewed efforts to tackle investment climate problems such as
corruption.
Helman Sitohang, CSFB's country head for Indonesia, argues that neither
of the
presidential candidates, the incumbent Megawati Sukarnoputri and frontrunner
Susilo
Bambang Yudhoyono, are market-unfriendly options.
While emerging market funds regarded Indonesian equities as fundamentally
undervalued, prompting the main Jakarta Stock Exchange index to jump
by more than
per cent last year, they might now find that a political discount
is justified.
But brokers seeking to benefit from a continued recovery remain sanguine.
As Mr
Sitohang puts it: "The approach now is: 'Is this attractive?
Is there a continuing upside?'
And I think the answer is yes."
International Herald Tribune
August 17, 2004
Op-Ed Contributor
Indonesia's Challenge: The Long, Slow Task of Building True Democracy
By Andrew Ellis IHT
STOCKHOLM Abody that possesses supreme power seldom gives it away
peacefully
and voluntarily. But this is precisely Indonesia's achievement as
it implements
constitutional changes agreed to two years ago. Power no longer lies
with the People's
Consultative Assembly. It is now divided between a fully elected legislature
with a new
second chamber representing the regions, a separate executive headed
by a directly
elected president, and an independent judiciary.
Two nationwide elections have been held this year, with more than
three
quarters of those eligible voting. They have been widely accepted
as well conducted
and marred by surprisingly few incidents of intimidation or logistic
problems. There is a vibrant press, although its freedom of expression
is not unchallenged and needs to be actively defended.
The question now is whether Indonesia can make democracy work by tackling
the
practical tasks of day-to-day governance, economic development, fighting
corruption and building the rule of law, which are much less glamorous
than
building a new institutional framework.
Both candidates in the second round of the presidential election,
President
Megawati Sukarnoputri and Susilo Bambang Yudhoyono, have to convince
Indonesians that they can direct an effective administration and take
serious steps to
clean up government.
What do we know about how best to make a presidential system work?
Latin
American countries and the Philippines have also trodden this path
in recent
years, with differing degrees of success. It helps for the president
to have a
substantial body of support in the legislature, which could be a challenge
for
Susilo, the current favorite to win the second round on Sept. 20.
It helps if the
president governs in partnership with the legislature and does not
seek
regularly to bypass it - and Indonesia's constitution makes the possibility
to
govern by decree limited. It helps if political parties are coherent
but do not
direct their elected representatives with a rod of iron - although
the central
leadership of Indonesia's political parties has a tendency to do just
that. On
balance, a better than even score.
There are still major unsolved problems for Indonesia's incoming presidency.
On the most difficult issues, like the continuing conflicts in the
provinces
of Aceh and Papua, the willingness to reach a solution may not even
be
universally accepted. But these issues stand alongside Indonesia's
second achievement
of its democratic transition. In the largest decentralization ever
attempted,
wide-ranging powers to deliver the services on which people rely day
to day -
education, health services, infrastructure - have been transferred
from
central government to more than 400 local authorities.
Some local authorities have made an impact, some have muddled through,
some
have failed and some have slept. Some have been attracted corruption,
with the
election of local executive heads a prime target. The next step, therefore,
is
direct election of governors and mayors. Communities that choose effective
leadership will benefit. In the longer term, local elected leadership
may become
a springboard for a new generation of national leaders.
The task of setting the archipelago on a successful democratic path
is as
slow as turning round an oil tanker. While it is taking place, Indonesia
has not
been able to pull its weight internationally. But if the new system
and the
new president succeed, this may change. If Indonesia can make economic
progress,
establish pluralist political institutions, maintain tolerance in
its diverse
society, advance the rule of law and reduce corruption - all at the
same time
- not only Asia but the rest of the world would sit up and take notice.
Andrew Ellis is head of electoral processes at the International Institute
for Democracy
and Electoral Assistance, based in Stockholm.
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