RECENT ECONOMIC REPORTS

INDONESIA: TRADE AND INVESTMENT HIGHLIGHTS

SEPTEMBER - NOVEMBER 2006

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Indonesia and Japan Announce Trade Agreement

On November 28 in Tokyo, visiting Indonesian President Susilo Bambang Yodhoyono and Japanese Prime Minister Shinzo Abe announced an agreement in principle between their two countries on “major elements” of a Japan-Indonesia “Economic Partnership Agreement” (EPA).  Under the EPA, the two countries hope to build closer economic relations through cooperation on capacity building, trade, investment and services liberalization, and cooperation on energy.  In trade area, Indonesia and Japan have agreed to eliminate or reduce tariffs covering more than 90 percent of current bilateral trade by value.  Sectors subject to tariff reduction or elimination include agriculture, forestry, fishery and industry.  According to a Japanese Embassy press release, the two sides agreed to make commitment to enhance trade in a number of services sectors including professional, communication, construction, distribution, education, financial, health and social related, tourism and transportation services.  The EPA will also facilitate investment between the two countries through commitments on national treatment, prohibition of performance requirements, a dispute settlement mechanism and enhanced investment protection.

Under the EPA, Indonesia and Japan agreed to cooperation in a wide range of industrial, agricultural, and services sectors undergoing liberalization.  The two sides also committed to enhance cooperation between their customs administrations through information exchanges, simplified customs procedures, and improved enforcement.  The two countries also agreed to cooperate to improve the protection of intellectual property (IP) rights, enhance transparency in government procurement, strengthen competition policy and improve the business environment.

Indonesia and Japan also agreed to promote and facilitate investment in the energy and mineral resources sector under the EPA through a strengthened policy dialogue and other cooperation.  Press reports said that Japan pledged to increase technical assistance to Indonesia in the areas of coal-to-liquid and energy-saving technology.   Indonesia is the largest supplier of natural gas to Japan, as well as the third and sixth largest exporter of coal and crude oil, respectively, to Japan.

Indonesia and U.S. Sign Customs MOU

On November 17, U.S. Ambassador to Indonesia B. Lynn Pascoe and Indonesia Ministry of Finance (MOF) Director General for Customs and Excise Anwar Suprijadi signed an MOU on mutual customs assistance.  The MOU establishes a framework for customs-to-customs technical assistance, information sharing, and law enforcement cooperation to facilitate greater trade and prevent transshipments and other customs offenses.  On the occasion of the signing, Ambassador Pascoe said, “The United States and Indonesia share a healthy and strategic trade partnership.  Total trade between our two countries reached US $15 billion in 2005, including US $12 billion in Indonesian exports.  Today’s agreement will help us build upon this relationship, ensure our markets remain open to each others goods, and facilitate even greater trade and exports for the benefit of both our economies and peoples.”  The MOU will assist in the gathering of evidence for criminal and civil cases involving trade fraud, money laundering, violations of export control laws, and drug smuggling. It will also permit our customs to exchange information and provide mutual assistance on a range of other issues, including combating terrorism and trafficking in persons.

Indonesia and U.S. Commit to Combat Illegal Logging

Also on November 17, U.S. Trade Representative Ambassador Susan C. Schwab and Indonesia’s Minister of Trade Mari E. Pangestu and Minister of Forestry M.S. Kaban signed an MOU to combat illegal logging and associated trade.  The agreement establishes a framework between U.S. and Indonesian authorities to share information on timber trade, including information on illegally produced timber products, and cooperation in law enforcement activities.  The agreement is an element of President Bush’s 2003 global Initiative to Address Illegal Logging.  In order to guide implementation and identify priority actions that both countries will undertake, the agreement establishes a working group under the existing U.S.-Indonesia Trade and Investment Framework Agreement (TIFA).  The United States committed immediately to fund US $1 million for initial supporting projects under the MOU, such as remote sensing of illegal logging activities and enhancing partnerships with non-governmental organizations (NGOs) and the private sector.  The signing took place on the margins of the Asia Pacific Economic Cooperation (APEC) meetings in Hanoi, Vietnam.

House Passes New Customs Law

The House of Representatives approved an amended Customs Law on October 18 that cuts red tape for importers and exporters and imposes stiffer sanctions on smugglers.  The revision is part of the GOI's effort to improve Indonesia's business and investment climate by overhauling taxation, investment, and customs and excise statutes.  Article 5 of the new law makes a potentially important change for importers and exporters by allowing them to submit customs clearance documents electronically.    Article 102 increases the penalties for individuals convicted of smuggling up to a maximum of 20 years in prison and a fine of up to Rp 100 billion (US $10.8 million).  The law also increases penalties for customs officials involved in smuggling by a third. 

Minister of Finance Sri Mulyani expressed optimism on October 18 that the new law would enhance Indonesia’s trade with the rest of the world, leading to greater economic development in the country.  Mulyani also expressed hope that the new law would support the rapid development of Indonesia’s trade and industry, provide legal certainty for businesses, and respond to the public desire to have a more transparent, efficient, and lower cost customs service.  The new law also increases the sentences and penalties for graft to discourage smugglers.

Indonesia’s Exports Pick Up

BPS announced on December 1 that Indonesia’s trade surplus rose to US $4.23 billion in October 2006, a 36% increase over the September figure, amid a significant rise in exports and a decline in the country’s imports.  Indonesia's total exports for the first ten months of 2006 reached US $82.2 billion, an increase of 16.3% year-on-year (YoY).  Non-oil and gas exports accounted for US $64.7 billion of the ten-month total, a YoY increase of 17.9%.  Commodities exports led non-oil and gas export growth, as coal and crude palm oil exports increased 47.6 and 16.9 percent, respectively.  Rubber and rubber exports also increased significantly, growing 63.3 percent YoY during the first ten months of the year.  January to October 2005 imports grew to US $50.2 billion, a 3.1 percent increase over the same period in 2005.  Indonesia’s trade surplus for the first ten months 2006 was up 45.5 percent YoY to US $32 billion.

Table 1: Indonesian Trade Performance Jan – Oct 2006:

 Foreign Investment Declines

Indonesia’s Investment Coordinating Board (BKPM) announced on November 14 that realized foreign direct investment (FDI) fell 48 percent to US $4.48 billion from January to October 2006 compared to the same period in 2005.  Realized domestic investment also fell by 19 percent YoY to Rp 13.56 trillion (US $1.49 billion) in the first ten months of 2006.  However, FDI and domestic investment approvals rose during the same period, rising 18 percent (to US $13.2 billion) and over 225 percent (to Rp 143.7 trillion – US $15.8 billion), respectively.  BKPM official Yus’an asserted that the high level of approvals reflects increased investor interest in Indonesia.  However, Yus’an admitted that obstacles to Indonesia realizing those investment gains persist.  He did not elaborate on the obstacles, but most analysts believe weak actual investment figures are a reflection of delays in the Government’s economic and bureaucratic reform program.  BKPM data do not cover industries such as oil and gas, banking and insurance.  

Indonesia Imports Rice from Vietnam

Despite protests from farmers groups and some Parliamentary factions, Indonesia began importing significant quantities of rice from Vietnam during October and November.  The imports follow the October 2 signing of contracts between the State Logistics Board (Bulog) and three Vietnamese companies for the importation of 210,000 metric tons of rice worth US $62.58 million.  The three companies-- Vietnam Southern Food Corp., Kien Giang Trading Company and Tien Giang Food Company -- were the winners in a Bulog tender process.  The GOI decided to permit rice imports after the country’s rice stocks dropped significantly due to increased demand during Ramadan and the provision of food assistance to victims of the May 2006 Jogjakarta earthquake.  More recently, the late arrival of seasonal rains and droughts have led to planting delays in key rice growing areas that will place further pressure on rise stocks. 

Indonesia and China Sign Economic Trade Agreements

Indonesian Minister of Trade Mari Pangestu and visiting Chinese Minister of Commerce Bo Xilai signed several economic and trade cooperation agreements on October 6 in Bali.  The agreements aim to boost bilateral economic, trade and technical cooperation, particularly in the investment field.  The agreements include Memoranda of Understanding (MOUs) on preventing and curing bird flu, economic cooperation, the establishment of a joint investment promotion committee, and the development of a China-Indonesia Economic and Trade Cooperation Website.  Both ministers expressed confidence that the two countries could reach their target of increasing bilateral trade to US $30 billion by 2010. 

U.S. and Indonesia Sign Textiles Transshipment MOU

Minister of Trade Mari Pangestu and U.S. Trade Representative Susan Schwab signed a MOU on Cooperation in Trade in Textiles and Apparel Goods on September 26 in Washington.  The MOU aims to combat illegal transshipments of textile and apparel goods from third countries through Indonesia to the U.S market.  The MOU establishes greater customs cooperation between the U.S. and Indonesia and allows for joint verification visits.  Minister Pangestu noted that the MOU was part of a "building block" approach to enhancing trade ties with the United States.  Indonesia's textile and apparel goods exports to the U.S. grew nearly 19 percent in 2005 to US $3.13 billion.  The U.S. has imposed safeguard quota measures until 2008 on imports of some textiles and garments originating from China, creating the risk of transshipment.  The U.S. also maintains quotas on garments from Vietnam. 

Indonesia to Issue Sugar Import Permits

Minister of Trade Mari Pangestu announced on September 15 that the GOI plans to issue white sugar import permits in 2007 to fill the gap between domestic output and consumption.  Subsequently, the Ministry of Trade (MOT) on December 4 issued import licenses for 200,000 tons of white sugar to the four existing registered sugar importers and one other company called PT PPI.  Indonesia, as the largest sugar consumer in Southeast Asia, expects to produce 2.48 million tons of white sugar in 2006, compared to 2.24 tons in 2005.  Analysts expect Indonesia to consume between 2.6 to 2.7 million tons of sugar in 2006.  Thailand is currently Indonesia’s largest supplier of imported sugar.  Minister of Agriculture Anton Apriyantono, however, announced on September 7 that his office would revise GOI regulations on sugar import tariffs to enable local refineries to compete more effectively for market share.  A Ministry of Agriculture official at that time said that current import tariffs for sugar (US $57.64 per metric ton for raw sugar and US $27.18 per metric ton for white sugar) were too low and affecting the competitiveness of local sugar producers.

GOI Drops Cast and Rolled Glass Anti-Dumping Investigation

The Indonesian Safeguard Committee (KPPI) announced on September 22 that it had dropped its safeguard investigation against cast and rolled glass from the U.S. and a number of Asian and European countries.  Local glass producer PT. Tossa Shakti, located in Central Java filed a petition in April 2006 with the KPPI requesting an investigation as to whether imported products of cast glass (HS code 7003.19.2000) and rolled glass (HS code 7003.19.9000) had caused injury to the domestic market during the 2002-2005 timeframe.  KPPI Chairperson Riyanto B. Yosokumoro noted that, based on its investigation, KPPI had found no causal link between the increase of imports during that time and any injury to the domestic industry.

Table 2:  Indonesia's Top 10 Non-Oil and Gas Export        

January to October 2006 (in US $ billions)

Table 3:  Indonesia's Main Non-Oil and Gas Export Destinations        

January to October 2006 (FOB value, in US $ billions)

Source : Central Statistic Agency (BPS)

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