VZCZCXRO0139
RR RUEHCHI RUEHDT RUEHHM
DE RUEHJA #3451/01 3421041
ZNR UUUUU ZZH
R 081041Z DEC 06
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 2414
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUEHKO/AMEMBASSY TOKYO 0150
RUEHBY/AMEMBASSY CANBERRA 0200
RUEHBJ/AMEMBASSY BEIJING 3754

UNCLAS SECTION 01 OF 04 JAKARTA 013451 
 
SIPDIS 
 
SIPDIS 
 
DEPT FOR EB/TPP/MTA AND EAP/MTS 
TREASURY FOR IA-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 - 
SEPTEMBER-NOVEMBER 2006 
 
 
¶1. Summary.  On November 28, Indonesia and Japan agreed in 
principle to the major elements of a bilateral "Economic 
Partnership Agreement" (EPA).  Parliament approved an 
amended Customs Law on October 18 that reduces red tape for 
importers and exporters and imposes stiffer sanctions on 
smugglers.  The Central Bureau of Statistics (BPS) announced 
on December 1 that Indonesia's exports grew 16.3 percent in 
the first ten months of 2006 compared to the same period a 
year earlier.  Less positively, the Investment Coordinating 
Board (BKPM) announced on November 14 that realized foreign 
direct investment fell 48 percent YoY to USD 4.48 billion 
during the first ten months of the year.  On October 6, 
Indonesia and China signed several bilateral agreements in 
Bali aimed at boosting mutual trade and investment.  The 
State Board of Logistics (Bulog) announced on October 2 that 
Indonesia would import 210,000 metric tons of rice from 
Vietnam worth USD 62.58 million.  Minister of Trade Mari 
Pangestu announced on September 15 that the Government of 
Indonesia (GOI) plans to issue white sugar import permits in 
2007 to fill an existing gap between domestic output and 
consumption.  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.  End summary. 
 
Indonesia and Japan Announce Trade Agreement 
-------------------------------------------- 
 
¶2.  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. 
 
¶3.  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. 
 
¶4.  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. 
 
House Passes New Customs Law 
---------------------------- 
 
¶5.  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 
 
JAKARTA 00013451  002 OF 004 
 
 
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 ($10.8 million).  The law also increases penalties 
for customs officials involved in smuggling by a third. 
 
¶6.  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 
--------------------------- 
 
¶7. (U) BPS announced on December 1 that Indonesia's trade 
surplus rose to $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 $82.2 billion, an increase of 16.3% year-on-year 
(YoY).  Non-oil and gas exports accounted for $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 USD 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 USD 32 
billion. 
 
--------------------------------------------- ---- 
Table 1: Indonesia Trade Performance Jan-Oct 2006 
         (in USD billions) 
--------------------------------------------- ---- 
                   Sep   Oct   2005  2006   Pct 
                    06    06   Jan   Jan    YoY 
                               Oct   Oct    (1) 
--------------------------------------------- ---- 
Exports            8.78  8.72  70.7  82.2  16.3 
 Oil and Gas       1.59  1.59  15.8  17.5  10.8 
 Non-oil and Gas   7.19  7.13  54.9  64.7  17.9 
 
Imports            5.66  4.49  48.7  50.2   3.1 
 Oil and Gas       1.92  1.67  14.8  16.2   9.5 
 Non-oil and Gas   3.74  2.82  33.9  34.0   0.3 
 
Balance of Trade   3.12  4.23  22.0  32.0  45.5 
 
(1) Percent increase year-on-year. 
 
Foreign Investment Declines 
--------------------------- 
 
¶8. (SBU) Indonesia's Investment Coordinating Board (BKPM) 
announced on November 14 that realized foreign direct 
investment (FDI) fell 48 percent to USD 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 ($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 $13.2 billion) 
and over 225 percent (to Rp 143.7 trillion - $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. 
 
JAKARTA 00013451  003 OF 004 
 
 
 
Indonesia Imports Rice from Vietnam 
----------------------------------- 
 
¶9.  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 $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 the provision of large scale food 
assistance to victims of the May 2006 Yogyakarta earthquake. 
 
Indonesia and China Sign Economic Trade Agreements 
--------------------------------------------- ----- 
 
¶10.  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 $30 
billion by 2010. 
 
Indonesia to Issue Sugar Import Permits 
--------------------------------------- 
 
¶11.  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.  The GOI is still determining what volume of 
sugar imports will be necessary and which importers will 
receive permits.  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 expected 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.  Such a move would most 
likely increase import tariffs on sugar.  A Ministry of 
Agriculture official said current import tariffs for sugar 
($57.64 per metric ton for raw sugar and $27.18 per metric 
ton for white sugar) are too low and affecting the 
competitiveness of local sugar refiners. 
 
GOI Drops Cast and Rolled Glass Anti-Dumping Investigation 
--------------------------------------------- ------------- 
 
¶12. 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 Non-Oil and Gas Exports 
         Jan-Oct 2006 (in USD billions) 
--------------------------------------------- ----- 
Commodity                      2005  2006  Pct of 
 
JAKARTA 00013451  004 OF 004 
 
 
                               Jan-  Jan-  Total 
                               Oct   Oct   2006 
--------------------------------------------- ---- 
Electrical tools               6.06  6.05    9.36 
Coal                           3.56  5.26    8.13 
Crude Palm Oil                 4.13  4.83    7.47 
Rubber and rubber products     2.94  4.80    7.43 
Machinery/mechanical tools     3.79  3.55    5.49 
Ash and Residues               2.55  3.51    5.43 
Garments - not Knitted         2.62  2.81    4.34 
Wood and wood products         2.65  2.70    4.18 
Chemical Organic               1.32  1.54    2.38 
Plastic and plastic products   1.31  1.49    2.31 
 
Total top 10 products         30.93  36.55  56.52 
Other                         23.93  28.12  43.48 
Total non-oil and gas exp     54.86  64.67 100.00 
 
--------------------------------------------- ---- 
Table 3: Indonesia's Main Non-Oil and Gas 
         Export Destinations 
         Jan-Oct 2006 (FOB value, in $ billions) 
--------------------------------------------- ---- 
Country of           2005     2006   Percent of 
Destination        Jan-Oct  Jan-Oct  Total (2006) 
--------------------------------------------- ---- 
Japan                7.92     9.68      14.97 
European Union       8.40     9.68      14.97 
U.S.A.               8.03     8.96      13.85 
Singapore            5.84     6.40       9.90 
China                3.26     4.45       6.88 
Malaysia             2.69     3.25       5.03 
South Korea          2.06     2.72       4.21 
Taiwan               1.45     1.88       2.91 
Australia            0.95     1.16       1.80 
Others              14.26    16.48      25.48 
--------------------------------------------- 
Total               54.86    64.67     100.00 
 
Source: Central Bureau of Statistics (BPS) 
 
PASCOE