A/S HILL DISCUSSES REFORM WITH FINANCE MINISTER AND

UNCLAS SECTION 01 OF 02 JAKARTA 004136 SIPDIS SIPDIS SENSITIVE STATE FOR EAP/MTS AND EB/IFD/OIA TREASURY FOR IA--AJEWELL E.O. 12598: N/A TAGS: EINV EFIN PGOV ID SUBJECT: A/S HILL DISCUSSES REFORM WITH FINANCE MINISTER AND AMCHAM ¶1. (SBU) Summary: Minister of Finance Sri Mulyani told Assistant Secretary Christopher Hill on March 3 that people are expecting more results from President Susilo Bambang Yudhoyono's (SBY) Administration in its second year, particularly in making the bureaucracy more responsible and efficient. She expressed concern that some provincial governments are holding on to central government budget allocations instead of spending them on improved social services. Mulyani also noted that Indonesia's legacy of corruption presents major obstacles, particularly in the area of tax reform. In a separate meeting, AmCham members told A/S Hill that SBY has set out a good economic reform program and is making progress, albeit at a slow pace. They claimed that the political inexperience of SBY's economic team, and strong nationalistic interests within Parliament, require the President to take a cautious approach to reform. AmCham members said that existing American investments are not leaving Indonesia, but labor and judicial concerns remain a constant worry and deter new investment. At the same time, Chinese companies continue to expand investments in Indonesia's oil, gas and power sectors. End Summary. Sri Mulyani: The People Want Results Now -------------- ¶2. (SBU) Mulyani said that now that SBY has been in office for more than a year, people are very keen to see results. She noted that growth has slowed due to higher inflation from last year's fuel price hikes, but remains strong. The economy has stabilized, but now the GOI needs to go deeper into structural reforms to make the bureaucracy more responsive and efficient. "We are living with the painful legacy of past corruption," she said. Mulyani noted she has taken strong steps against abuse by tax officials, telling them they will be opened up to monitoring and scrutiny. "No more forgiveness, no more godfather protection," she said. ¶3. (SBU) A/S Hill praised the GOI for setting out a solid economic policy framework and taking several bold decisions over the past year, including the October 2005 fuel subsidy cuts. However, he added that the U.S. business community remains concerned about investment climate issues, including uncertainty about tax, labor and judicial reforms. A/S Hill commented that outlining "known consequences" to officials engaged in corrupt activities can be a powerful tool. ¶4. (SBU) Ambassador Pascoe noted that one of Mulyani's early successes was getting budget allocations sent to provicial governments on time (January 2),after multi-month delays last year. Mulyani said that despite the allocations, she is watching spending because some localities are holding onto their money instead of using it for improved social services. On the labor issue, Mulyani said that manufacturing could no longer be a growth engine for Indonesia since it is now competing with China and Vietnam. Rather than focusing on manufacturing, the GOI is looking for new ideas to promote the underdeveloped services sector, as well as agribusiness. Former President Suharto handled mining and mineral policy poorly, she added, so the sector is suffering from tensions. There is an urgent need for a new strategy for responsible natural resources development. ¶5. (SBU) A/S Hill noted that despite the considerable press attention to India, Secretary Rice's visit would help highlight Indonesia. Mulyani said that her two basic messages for the Secretary would be that on internal matters, Indonesia "is on the right path to reform." But pushing reforms forward can be fatiguing, and sometimes it seems that "corruption" is the only label in town. On external issues Mulyani said Indonesia needs support. "Though we are not yet achieving strong results, we'd like a pat on the back that we are maintaining momentum on change in the right direction. We need support, not criticism. If Dr. Rice can make supportive statements, that would be great," she said. AmCham Governors: Reforms on the Right Track -------------- ¶6. (SBU) American Chamber of Commerce Board of Governors members told A/S Hill that President Yudhoyono is a savvy but cautious leader, who is moving in the right direction JAKARTA 00004136 002 OF 002 with a solid economic reform program. However, his economic ministers, while technically competent, tend to lack "political maturity." Nationalistic interests with their supporters in politics often undermine reform efforts. Within this dynamic, SBY prefers to postpone difficult policy decisions until the Indonesian public expects a change and perceives SBY has no other choice, and SBY has an opportunity to reach accommodation with his political opponents. On the whole, Board members felt the President's approach is producing good results, albeit at a pace slower than most investors would like. They noted that SBY's success in raising fuel prices 126 percent in October 2005 was emblematic of this approach, and it stood in stark contrast to former President Megawati's failed attempt to raise fuel prices in early 2003 by a much smaller amount. Some Board members did wonder, though, whether SBY could maintain forward momentum. ¶7. (SBU) AmCham Board members said that most American companies maintained their investments in Indonesia during and after the financial crisis, and those that stayed put have typically earned good profits over the past four years. But persistent business and investment climate issues continue to worry existing investors and deter significant new investment, with labor and judicial concerns posing the greatest risks to foreign investors. Under Indonesia's labor law, foreign firms must maintain bank deposits to cover the possible cost of severance payments for all their employees, and it is almost impossible to dismiss employees unless they have committed a crime and police bring criminal charges against them. Furthermore, Indonesia's weak judicial system provides little guarantee of sanctity of contract. Frivolous cases remain a real threat, including those resulting in criminal charges against heads of foreign companies (i.e.: Newmont Mining and Manulife Insurance). ¶8. (SBU) The Ambassador commented that the SBY Administration inherited the Newmont case and had miscalculated by entrusting the courts to quickly dismiss it. Amcham Board members said they continue to work closely with the Embassy and other business associations, such as the influential Indonesian Chamber of Commerce, to assist and push the government on further reform. ¶9. (SBU) Several AmCham members said that SBY and some of his ministers are very concerned that Indonesia is losing out in the regional competition for investment. As multi- nationals pursue a "China plus one" strategy in Asia, it appears most are viewing Malaysia, Thailand and Vietnam as more business friendly than Indonesia. The Ambassador noted there is a sense within the GOI economic team that Indonesia had lost 10 years of development while its ASEAN rivals had developed niches in sectors such as automotives and electronics. AmCham members expressed concern that Chinese investors, with support from the Chinese government and the ethnic Chinese Indonesian community, are rapidly expanding their investments in Indonesia's oil, gas and power sectors. A/S Hill agreed that China's regional and cultural links, as well as often shady business practices, provide Chinese companies with a leg up in winning contacts in Indonesia. However, he assured the group that senior USG officials, including President Bush, remain committed to advocating for U.S. companies overseas. AMSELEM