INDONESIA - TRADE AND INVESTMENT HIGHLIGHTS -

UNCLAS SECTION 01 OF 04 JAKARTA 005700

SIPDIS

SIPDIS

DEPT FOR EB/TPP/MTA AND EAP/MTS
TREASURY FOR IA - ANNA JEWELL
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 -
APRIL 2006



1. Summary: Indonesia's 2006 first quarter exports
increased 12.5 percent year-on-year (YoY) to USD 22.4
billion, while imports dipped slightly. Electrical
tools, coal, and rubber and rubber products led all
exports. Indonesia and Japan held a fourth round of
bilateral Economic Partnership Agreement talks April 17-
21 in Tokyo. President Susilo Bambang Yudhoyono on April
7 said his administration would postpone submitting to
parliament proposed revisions to Indonesia's 2003 Labor
Law. The move followed large labor demonstrations
opposing the plan. The Ministry of Manpower and
Transmigration issued a decree in late March allowing
companies to apply for expatriate work permits prior to
workers arrival in Indonesia. Minister of Transportation

M. Hatta Rajasa said on April 21 that the Indonesian
Government (GOI) is considering a USD 200 million soft
loan from China to finance construction of double-track
railway connecting West and Central Java.
Representatives from government and business met on April
12 to discuss plans to support and revitalize Indonesia's
textile industry. A leading Indonesian automobile
industry association reported that first quarter car
sales in Indonesia declined 45 percent YoY. The Ministry
of Finance on April 17 announced that it plans to abolish
import duties on raw materials for textiles, beverages,
footwear and electronics. Minister of Trade Mari
Pangestu said on April 19 that her Ministry would abandon
plans to issue more sugar import licenses. End Summary.

Export Growth Continues
--------------


2. The Central Bureau of Statistics (BPS) announced on
May 1 that Indonesia's exports reached USD 22.4 billion
for the first quarter (Q1) of 2006, a YoY increase of
12.5 percent. Non-oil and gas exports rose to USD 17.2
billion, a YoY increase of 10.7 percent. First quarter
2006 imports were USD 13.2 billion, a -2.5 percent
decline YoY. Despite a 7.4 percent appreciation of the
Indonesian currency, the Rupiah, in Q1 of 2006, declining
imports and strong export growth resulted in Indonesia's
trade surplus increasing 44.9 percent during the quarter.

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Table 1: Indonesia Trade Performance Q1 2006:
(in USD billions)
-------------- --------------
2005 2006 Percent
Q1 Q1 Increase
2006/2005
-------------- --------------
Exports 19.87 22.35 12.5
Oil and Gas 4.34 5.15 18.7
Non-oil and Gas 15.53 17.20 10.7
Agricultural 0.67 0.89 32.2
Industrial 13.25 14.18 6.9
Mining and others 1.61 2.13 32.4

Imports 13.58 13.23 -2.5
Oil and Gas 3.75 3.64 -2.9
Non-oil and Gas 9.83 9.59 -2.4

Balance of Trade 6.29 9.12 44.9

Imports by Broad Economic Categories:

Imports
Consumption Goods 1.04 1.22 17.5
Raw Materials 10.67 9.74 -8.7
Capital Goods 1.86 2.27 21.7

Source: Central Bureau of Statistics (BPS)


3. Indonesia's agriculture and mining sectors recorded
the highest Q1 export growth at 32.2 and 32.4 percent
respectively YoY. Minister of Trade Mari Pangestu noted
on April 19 that world demand for agriculture goods, such
as fish and shrimp, remains high and offers a good
opportunity for Indonesia to boost exports in these labor-
intensive sectors. Overall, electrical tools, coal, and
rubber and rubber products were Indonesia's top three non-

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oil and gas export earners in Q1, accounting for USD 1.8,
USD 1.3 and USD 1.2 billion respectively. Total imports
declined in Q1 with weaker demand for raw materials. The
United States edged out Japan as Indonesia's largest non-
oil and gas export destination in Q1 of 2006. Singapore
remained a close third.

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Table 2: Indonesia's Top 10 Non-oil and Gas Exports
Q1 2006 (In USD billions)
-------------- --------------
Percent
Commodity 2005 2006 of Total
Q1 Q1 2006
-------------- --------------
Electrical Tools 1.69 1.77 10.3
Coal 0.87 1.33 7.7
Rubber and rubber products 0.81 1.25 7.3
Mechanical appliance 0.98 0.94 5.5
Copper, Ash and Residues 0.76 0.82 4.8
Garment - not Knitted 0.78 0.80 4.7
Furniture, home lightings 0.86 0.68 3.9
Pepper 0.53 0.57 3.3
Household products 0.55 0.52 3.0
Fish and shrimps 0.38 0.47 2.7

Total top 10 products 8.21 9.15 53.2
Other 7.32 8.05 46.8
Total non-oil and gas exp 15.53 17.20 100.0


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Table 3: Indonesia: Main Non-Oil and Gas Export
Destinations, Q1 2006. FOB value, in USD billions)
-------------- --------------

Country of 2005 2006 Percent of
Destination Q1 Q1 Total (2006)
-------------- --------------
U.S.A. 2.36 2.53 14.7
Japan 2.34 2.37 13.8
Singapore 1.58 1.78 10.4
China 0.86 1.03 5.9
Malaysia 0.75 0.94 5.5
South Korea 0.52 0.67 3.9
European Union 2.54 2.90 16.9
Taiwan 0.38 0.43 2.5
Australia 0.28 0.33 1.9
Others 3.91 4.21 24.5
-------------- --------------
Total 15.53 17.20 100.0

Source: Central Bureau of Statistics (BPS)

Indonesia-Japan Continue Bilateral Talks
--------------


4. The Governments of Indonesia (GOI) and Japan held a
fourth round of Economic Partnership Agreement (EPA)
talks from April 17-21 in Tokyo. The talks, which began
in 2005, are aimed at easing trade barriers, improving
Indonesia's trade capacity, addressing intellectual
property rights (IPR),and boosting Japanese investment
into Indonesia. According to Ministry of Trade
officials, Indonesia has requested improved access for
its labor force to work in Japan, particularly for
factory workers, sailors, and home care workers for the
elderly.

GOI Delays Labor Law Revisions
--------------


5. President Susilo Bambang Yudhoyono on April 7 said
his administration would postpone the submission to
Parliament of draft revisions to Indonesia's 2003 Labor
Law following large labor demonstrations opposing the
plan. On April 5, an estimated 50,000 demonstrators
protested revisions to the existing law, claiming that
they favored business at the expense of workers' rights
and welfares. Additional labor demonstrations took place
on May 1 and 3. Following a meeting with Vice President

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Kalla, business groups and labor unions on April 7,
Minister of Manpower and Transmigration Erman Suparno
said the GOI would form a tripartite committee to study
the issue further and make recommendations for a draft
law acceptable to all parties. Labor unions have
threatened to stage further mass demonstrations on May
Day, May 1, and throughout the month of May.


6. The Yudhoyono Administration has made labor law
reform in 2006 a cornerstone of its comprehensive,
February 27 "Investment Climate Improvement Package".
Business groups and investors have argued that provisions
of the 2003 Labor Law make it cost prohibitive to hire
and fire workers, noting that, on average, dismissed
workers are entitled to nine months of severance pay,
regardless of the circumstances of their separation for a
company.

GOI Eases Expatriate Work Permits Requirements
-------------- -


7. The Ministry of Manpower and Transmigration in late
March issued decree no.7/2006 on procedures for obtaining
a permit to employ expatriate workers. The decree, which
took effect on May 1, allows local employers to apply for
and obtain work permits for expatriate employees before
they arrive in Indonesia. Under a previous decree,
expatriate workers were required to apply for work
permits when they arrived in Indonesia, a process that
could delay their employment for months. The process for
obtaining expatriate work permits involves sixteen
separate approvals from five ministries, costing an
estimated USD 1,800, including a USD 1,200 annual fee to
support development of Indonesian workers' skills. The
GOI has pledged to simplify the process as part of its
February 27 investment climate package. The Indonesian
Employers Association (Apindo),claims that the GOI has
failed to use the large sums collected from some 40,000
expatriates living in Indonesia over the past three
decades to effectively develop skills of Indonesian
workers.

GOI Considers Chinese Railway Loan
--------------


8. Minister of transportation M. Hatta Rajasa announced
on April 21 that the GOI is considering a USD 200 million
soft loan from China to build a 159 kilometer double
track railway connecting Cirebon, West Java to Kroya,
Central Java. Rajasa said the loan would be part of a
USD 800 million loan commitment from China through 2025
for infrastructure projects in Indonesia, which was
agreed to during Vice President Jusuf Kalls's April 20
trip to China. The Cirebon-Kroya double track railway
project would contain a 60 percent local component,
according to Rajasa. He added that the GOI hoped to
tender the project soon, select a contractor by September
2006, and begin the project by the end of the year.

GOI Seeks to Reinvigorate Textile Industry
--------------


9. Minister of Industry Fahmi Idris, Minister of Trade
Mari Pangestu, and representatives of Indonesia's major
textile producers associations met on April 12 to discuss
plans to reinvigorate Indonesia's textile and garment
sectors. According to Idris, the GOI plans to work with
the industry and international organizations to revamp
manufacturing facilities, increase investment in the
sector, and eradicate textile smuggling. The Minister
noted that most Indonesian textile machinery is more than
two decades old and needs upgrading. He expressed hope
that local banks would provide USD 100 million and the
International Finance Corporation (IFC) USD 250 million
in loans to support restructuring of the industry.
Minister of Trade Mari Pangestu said that her ministry
would tighten controls over textile trading in the
domestic market and better enforce anti-smuggling laws.

Vehicle Sales Drop Dramatically
--------------

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10. Indonesian Automotive Manufacturers Association data
shows that unit car sales fell to 80,000 for Q1 of 2006,
a 45 percent decline YoY. Industry analysts expect
automobile sales in 2006 to reach just 400,000 units, a
33.5 percent decrease from the 533,910 units sold in

2005. They linked the decline in sales to October 2005
fuel price hikes and the resulting inflation and higher
interest rates on consumer loans. Meanwhile, the
Indonesian Motorcycle Manufacturers Association announced
on April 15 that motorcycle sales dropped slightly to
906,000 units in Q1 of 2006, a 0.03 percent decline from
the 906,245 units sold in Q1 of 2005.

GOI Considers Abolishing Import Duties
--------------


11. The Ministry of Finance announced on April 17 plans
to abolish import duties on raw materials for textiles,
beverages, footwear and electronics as part of an effort
to boost growth in these industries. A Ministry of
Finance official noted that the GOI is also considering
exempting commodity goods produced by those four
industries from value-added tax. The GOI currently
applies between five to fifteen percent import duties on
raw materials for these sectors, and 10 percent value-
added tax on the goods they produce.

Sugar Import Licenses Halted
--------------


12. Minister of Trade Mari Pangestu announced on April
19 her ministry has abandoned earlier plans to issue
additional sugar import licenses this year. According to
Pangestu, local sugar production in 2006 should reach
2.48 million tons, and local consumption 2.27 million
tons. The Ministry of Trade has issued licenses for the
importation of 300,000 tons of sugar in 2006. Licensees
have already imported 190,000 tons and are authorized to
import another 55,000 tons. State Logistic Agency
(Bulog) and state trading firm PPI are to share equally
the importation of the remaining 110,000 tons.


14. According to at 2004 Ministry of Trade Decree
(No.02/M/Kep/XII/2004),sugar imports are subject to the
following requirements:

-- Importation of sugar is allowed for "plantation white
sugar" with ICUMSA numbers between 70 IU to 200 IU;

-- Importation of sugar is prohibited from one month
before to two months after the harvest season;

-- Importation of sugar is permitted when when the basic
price of sugar paid to farmers rises above Rp 3,410 per
kilogram;

-- Importation of sugar is allowed when domestic
production cannot meet demand;

-- The Ministry of Agriculture determines the period of
harvest seasons; and

-- An interagency coordinating meeting determines basic
sugar prices, sugar stock status, and the amount
allowable for import.

PASCOE