INDONESIA TRADE AND INVESTMENT HIGHLIGHTS -

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

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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.

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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.

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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.

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Table 2: Indonesia's Top Non-Oil and Gas Exports
Jan-Oct 2006 (in USD billions)
-------------- --------------
Commodity 2005 2006 Pct of

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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

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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
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Total 54.86 64.67 100.00

Source: Central Bureau of Statistics (BPS)

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