VZCZCXRO3468
RR RUEHCHI RUEHDT RUEHHM
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. 
 
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