VZCZCXRO9940
RR RUEHCHI RUEHDT RUEHHM
DE RUEHJA #0777/01 0790736
ZNR UUUUU ZZH
R 200736Z MAR 07
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 3903
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUEHKO/AMEMBASSY TOKYO 0410
RUEHBY/AMEMBASSY CANBERRA 0546
RUEHBJ/AMEMBASSY BEIJING 3995

UNCLAS SECTION 01 OF 05 JAKARTA 000777 
 
SIPDIS 
 
SIPDIS 
 
DEPT FOR EB/TPP/MTA AND EAP/MTS 
TREASURY FOR IA-SEARLS 
USDOC FOR SBERLINGETTE/4430 
DEPT PASS USTR DKATZ 
 
E.O. 12958: N/A 
TAGS: ETRD EINV ECON KIPR ID
SUBJECT: INDONESIA TRADE AND INVESTMENT HIGHLIGHTS - FEBRUARY 2007 
 
¶1. Summary:  Minister of Trade Mari Pangestu said on February 26 
that a global economic slowdown could reduce Indonesia's export 
growth to 14.5% in 2007, lower than the Government of Indonesia's 
(GOI) 20% target.  The GOI issued a regulation on January 2 granting 
tax incentives for Indonesian companies or cooperative investments 
in certain business sectors.  According to industry data, domestic 
motorcycle sales rose 28.5% in January 2007 on a year on year (YoY) 
basis, while automobile sales grew only 0.62% in January 2007 and 
dropped 8% in February 2007 YoY. The Investment Coordinating Board 
(BKPM) announced on February 7 that realized foreign direct 
investments (FDI) in Indonesia's automotive sector reached $438.5 
million in 2006.  Riken Corporation of Japan and PT. Pakarti Riken 
Indonesia announced they would begin manufacturing vehicle engine 
camshafts in Indonesia to supply the Southeast Asia region beginning 
this summer.  The Ministry of Trade (MOT) announced on February 26 
that it would not allow a Japanese 7-Eleven retailer to expand its 
operations to Indonesia without a local partner.  The MOT also 
announced on February 14 that it has authorized BULOG to import 
500,000 tons of rice from March to April 2007.  Indonesia's Toll 
Road Regulatory Body (BPJT) announced on February 16 that it will 
tender six toll road projects in the Jakarta area.  High world 
commodity prices drove Indonesia's exports in 2006 to a record 
$100.7 billion. End summary. 
 
GOI Sets 2007 Export Growth Target of 20% 
----------------------------------------- 
 
¶2.  Vice President Jusuf Kalla chaired a cabinet level coordination 
meeting on trade on February 26 to discuss ways to meet President 
Yudhoyono's goal of 20% export growth in 2007.  After the meeting, 
Kalla told the press Indonesia's improving infrastructure and 
financial sector strength will enable the country to meet this 
target.  He asked that that the country's banking sector increase 
lending and other support to the export manufacturing sector. 
However, according to press reports, Trade Minister Mari Pangestu 
said that 14.5% export growth was a more reasonable target for 2007. 
 She noted that the world economy may be slowing and that existing 
stockpiles of commodities could drive down record high commodity 
prices, as well as the value of Indonesia's total exports in 2007. 
Indonesia recorded export growth of 19.7% percent in 2006 with total 
exports topping $100 billion ($100.7 billion) for the first time. 
 
GOI Implements New Investment Incentives 
---------------------------------------- 
 
¶3. On January 2, the GOI issued a regulation (PP1) granting tax 
incentives for Indonesian domestic investments in certain business 
sectors effective January 1, 2007. The new regulation provides: 
 
-- Accelerated depreciation of fixed assets at twice the rate under 
normal circumstances; 
 
-- Tax loss carry-forward up to 10 years (instead of 5); 
 
-- Investment tax credit reduction of net income by 30% of capital 
(land, buildings, equipment) invested to be pro-rated over six 
years, at 5% per year. 
 
Only investments in Indonesian companies (domestic "PT" or limited 
liability companies) or Indonesian cooperatives ("Koperasi") qualify 
for the incentives.  Qualifying investments must also be made in the 
following sectors: 
 
- Food seasoning; 
- Textiles and garments; 
- Pulp and Paper; 
- Carton and Cardboard; 
- Industrial or chemical substances; 
- Rubber or rubber products; 
- Porcelain; 
- Base metals, base iron and steel; 
- Machinery and accessories; 
- Electric motors, generators, transformers; 
- Electronics; 
- Land transportation; 
- Ship building and repair. 
 
¶4. Some investment analysts have raised concerns about the scope of 
the regulation, noting that the GOI should expand it to encourage 
more high-tech and capital intensive investments.  They added that, 
without significant GOI progress in implementing other promised 
investment related reforms, it is unlikely that the new regulation 
 
JAKARTA 00000777  002 OF 005 
 
 
will have a significant impact on new investment, particularly from 
overseas. 
 
Motorcycle Sector Rebound; Autos Remain Sluggish 
--------------------------------------------- --- 
 
¶5.  The Indonesian Motorcycle Industry Association (AISI) announced 
on February 19 that domestic motorcycle sales rose to 342,773 units 
in January 2007, a 28.5% increase YoY from 266,618 units.  AISI also 
reported that Astra International -- the largest motorcycle dealer 
in Indonesia -- increased its market share slightly to 45% in 
January 2007 from 44% a year earlier.  Honda and Yamaha products 
dominate Indonesia's domestic motorcycle market.  Honda sales rose 
31.4% YoY to 153,806 units in January, while Yamaha recorded a 25.4% 
increase YoY to 133,200 units. 
 
¶6.  Indonesia Automotive Industries Association (Gaikindo) announced 
on February 19 that domestic car sales reached 26,788 units in 
January 2007, a slight increase of 0.62% YoY from 26,622 units in 
¶2006.  Car sales, however, subsequently fell 8 percent in February 
2007 to 23,811 from 25,959 units in February 2006.  Gaikindo 
reported that Astra International -- Indonesia's largest car dealer 
-- suffered a drop in market share to 56% in January 2007 from 65% 
in January 2006.  Astra's car sales fell to 15,016 units in January, 
from 17,351 a year earlier, and from 16,390 in December 2006.  Astra 
Investor Relations Head Richard Santosa said on February 19 that the 
company no longer enjoyed the backlog of orders that boosted sales 
for most of 2006.  Indonesia's vehicle sales plunged by roughly 40% 
in late 2005 and early 2006 following an October 2005 GOI decision 
to dramatically reduce fuel subsidies.  Subsequent higher fuel 
prices have caused consumers to shift to smaller more fuel-efficient 
models.  Vehicle sales reached a record high of 533,910 units sold 
in 2005, but plunged to just 318,883 units sold in 2006, a decline 
of 40%.  Industry analysts predict vehicle sales will reach between 
350,000 and 400,000 units in 2007. 
 
Table 1: Domestic car sales 
--------------------------------------------- ------- 
Brand/company         Jan 07  Feb 07  Jan 06  Feb 06 
--------------------------------------------- ------- 
Honda                  2,313   3,350   3,598   2,384 
Suzuki                 3,837   3,504   2,330   2,768 
Toyota                 9,530   8,057  13,191   9,609 
Astra International   15,016  12,490  17,351  15,872 
Daihatsu               4,097   2,997   2,842   2,728 
Mitsubishi             3,658   2,305   1,979   3,314 
--------------------------------------------- ------- 
Total                 26,788  23,811  26,622  25,959 
--------------------------------------------- ------- 
Source: Gaikindo 
 
¶7.  The Investment Coordinating Board (BKPM) announced on February 7 
that actual realized foreign direct investment (FDI) in the 
automotive sector reached $438.5 million in 2006, the highest amount 
in the last six years.  The BKPM reported that foreign investors 
implemented 28 projects in the automotive sector in 2006, compared 
to 31 projects in 2005.  The $438.5 million figure represents a 22% 
from the $359.7 million invested in 2005.  According to BKPM, the 
automotive sector accounted for 7.3% of total FDI projects in 2006. 
 
Japan Investor to Produce Automobile Parts 
------------------------------------------ 
 
¶8.  Japan's Riken Corporation and its domestic partner PT. Pakarti 
Riken announced on February 23 that they will begin production of 
camshafts for automobile engines in Indonesia by the summer of 2007. 
 Riken says that the move is part of the company's broader efforts 
to cut delivery times and integrate production operations in 
Southeast Asia.   Riken will hold a 40% stake in the endeavor and 
will invest $2.5 to $3.3 million in facilities that can manufacture 
50,000 automobile camshafts per month.  Riken said it chose 
Indonesia as a production base because large automakers, such as 
Toyota and Daihatsu, are increasing production in the country. 
 
MOT Requires 7-Eleven 
Retailer to Use Local Partner 
----------------------------- 
 
¶9.  Minister of Trade Mari Pangestu announced on February 26 that 
her ministry would not approve plans of a Japanese 7-Eleven retailer 
to expand into Indonesia's retail sector.  With support from the 
Government of Japan, the retailer proposed to invest in a retail 
 
JAKARTA 00000777  003 OF 005 
 
 
chain that it would fully own and control.  According to Pangestu, 
the GOI would not alter existing Indonesian retail regulations, 
regardless of the outcome of Economic Partnership Agreement (EPA) 
negotiations between the two countries.  Minister of Trade Decree on 
Franchising No.12/2006 requires that international franchises use 
local partners when expanding operations to Indonesia.  In recent 
years, mini-market franchises have spread across Indonesia, 
particularly in urban areas.  Growth of these modern markets has 
increased government revenue and formal sector employment.  However, 
the country's traditional traders often complain that they cannot 
compete with the lower prices of mini-markets and larger 
hypermarkets.  Traditional traders and some politicians in the past 
have called on the GOI to place greater controls on the development 
of modern markets in Indonesia. 
 
MOT Authorizes BULOG to Import Rice 
----------------------------------- 
 
¶10.  Following a rice coordination meeting on February 13, the MOT 
announced on February 14 that it has authorized the National 
Logistic Agency (BULOG) to import 500,000 tons of rice.  On February 
21, BULOG indicated that it would import 200,000 tons of rice 
through government to government mechanisms, 200,000 tons through 
direct appointment to certain rice importers, while the remaining 
100,000 tons would be sourced through an open tender process. 
Ministry of Trade authorization letter no. 138/2007 authorizes BULOG 
to import the following amounts of rice through 14 ports between 
March and 
April this year: 
 
-- Lhokseumawe, Aceh                6,000 tons 
-- Belawan, North Sumatra           24,000 tons 
-- Teluk Bayur, West Sumatra        12,000 tons 
-- Dumai, Riau                      22,000 tons 
-- Panjang, Lampung                 36,000 tons 
-- Tanjung Priok, Jakarta           40,000 tons 
-- Tanjung Emas, Central Java       60,000 tons 
-- Tanjung Perak, East Java        180,000 tons 
-- Ujung Pandang, South Sulawesi    24,000 tons 
-- Pare-pare, South Sulawesi        42,000 tons 
-- Celukan Bawang, Bali              6,000 tons 
-- Mataram, West Nusa Tenggara      12,000 tons 
-- Kupang, East Nusa Tenggara       30,000 tons 
-- Jayapura, Papua                   6,000 tons 
 
¶11. Rice is a staple food for most Indonesians and constitutes a 
significant component of poverty calculations in the country.  From 
January 1 - March 2, 2007, rice prices increased 17.7% to $0.67 per 
kg.  An October 2006 World Bank Study indicated that rice price 
increases were largely responsible for an increase in Indonesia's 
poverty rate in 2006 to 17.8% from 16% in 2005. 
 
Jakarta Toll Road Tenders Move Forward 
-------------------------------------- 
 
¶12.  Indonesia's Toll Road Regulatory Body (BPJT) announced on 
February 16 that it would tender six toll road projects in the 
Jakarta area worth an estimated $2.55 billion.  The BPJT said that 
the projects are part of a Jakarta provincial government initiative 
to build new highways to reduce traffic congestion in the city.  Bid 
selections will reportedly begin in June and July 2007.  The six 
projects include: 
 
-- A 9.65 km road connecting Kemayoran in Central Jakarta and 
Kampung Melayu in East Jakarta; 
 
-- A 11.38 km road connecting Tomang in West Jakarta and Kampung 
Melayu in East Jakarta; 
 
-- A 18.95 km road connecting Rawa Buaya in West Jakarta and Sunter 
in North Jakarta; 
 
-- A 14.73 km road connecting Sunter in North Jakarta and Pulo 
Gebang in East Jakarta; 
 
-- A 9.56 km connecting Pasar Minggu in South Jakarta and Casablanca 
in Central Jakarta; and 
 
-- A 8.27 km connecting Ulujami in South Jakarta and Tanah Abang in 
Central Jakarta 
 
Information on the tender can be found on the Indonesian  Ministry 
 
JAKARTA 00000777  004 OF 005 
 
 
of Public Work website at https://eproc.pu.go.id. 
 
Indonesia Rides the Commodities Boom 
------------------------------------ 
 
¶13.  Indonesia's exports soared for the first time to over $100 
billion in 2006, underpinning respectable gross domestic product 
growth of 5.55 for the year.  A rise in non oil and gas exports, 
particularly commodities, drove the country's strong export 
performance.  In general, high prices, rather than increases in 
export volumes, led to the large increases in many commodities 
(Table 3).  Among commodities, close analysis of Indonesia's trade 
data, however, indicates that 2006's non-oil export boom largely 
resulted from high world commodity prices rather than significant 
increases in export volumes.  Exports of Indonesia's top 
manufactured goods have remained flat or declined.  Most analysts 
believe that Indonesia can likely depend on continuing strength in 
global commodity prices to support solid export-led GDP growth.  In 
the longer term, though, limited investment in manufacturing 
facilities and growing infrastructure bottlenecks may hinder export 
growth, especially if commodity prices flatten out. 
 
----------------------------------------- 
Table 2: Indonesia Trade Performance 2006 
                 (in $ billions) 
----------------------------------------- 
                   2005  2006   % YoY(1) 
----------------------------------------- 
Exports            85.6  100.7    17.5 
Oil and Gas        19.2   21.2    10.2 
 Non-oil and Gas   66.4   79.5    19.7 
 
Imports            57.7   61.0     5.8 
 Oil and Gas       17.5   18.9     8.7 
 Non-oil and Gas   40.2   42.1     4.6 
 
Balance of Trade   27.9   39.7    42.3 
 
(1) Percent increase year-on-year. 
 
--------------------------------------------- ----- 
Table 3: Indonesia's Top Non-Oil and Gas Exports 
         2006 (in $ billions) 
--------------------------------------------- ----- 
Commodity                      2005  2006  Pct of 
                                           Total 
                                           2006 
--------------------------------------------- ---- 
Electrical tools               7.33  7.30  9.18 
Coal                           4.48  6.47  8.14 
Crude Palm Oil                 4.95  6.00  7.56 
Rubber and rubber products     3.58  5.54  6.97 
Ash and Residues               3.49  4.90  6.17 
Machinery/mechanical tools     4.56  4.39  5.52 
Garments - not Knitted         3.07  3.38  4.25 
Wood and wood products         3.11  3.33  4.19 
Copper                         1.26  1.90  2.40 
Chemical Organic               1.53  1.83  2.30 
 
Total top 10 products         37.38 45.06 56.67 
Other                         29.05 34.45 43.33 
Total non-oil and gas exp     66.43 79.50 100.00 
 
--------------------------------------------- ---- 
Table 4: Indonesia's Main Non-Oil and Gas 
         Export Destinations 
         2006 (FOB value, in $ billions) 
--------------------------------------------- ---- 
Country of           2005     2006   Percent of 
Destination                          Total (2006) 
--------------------------------------------- ---- 
Japan                9.56    12.20   15.35 
European Union      10.23    11.96   15.04 
U.S.A.               9.51    10.66   13.41 
Singapore            7.07     7.81    9.82 
China                3.96     5.45    6.86 
Malaysia             3.31     3.73    4.69 
South Korea          2.59     3.40    4.28 
Taiwan               1.78     2.27    2.86 
Australia            1.13     1.62    2.04 
Others              17.27    20.39   25.66 
--------------------------------------------- 
 
JAKARTA 00000777  005 OF 005 
 
 
Total               66.43    79.50   100.00 
 
Source: Central Bureau of Statistics (BPS) 
 
HEFFERN