INDONESIA TRADE AND INVESTMENT HIGHLIGHTS - JANUARY 2007

UNCLAS SECTION 01 OF 02 JAKARTA 000368

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SIPDIS

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TAGS: ETRD EINV ECON KIPR ID
SUBJECT: INDONESIA TRADE AND INVESTMENT HIGHLIGHTS - JANUARY 2007



1. Summary: Indonesia's exports soared to a record US$ 100.7
billion in 2006, largely due to high world commodity prices.
Ministry of Industry (MOI) Secretary General Agus Tjahajana
announced on January 18 that the Government of Indonesia (GOI)
expects manufacturing sector output to grow by 7.9% in 2007.
Director General for International Trade Diah Maulida announced on
January 15 that the Ministry of Trade (MOT) is considering
abolishing a 2002 Textile Decree because it is leading to trade
distortions. On December 29, 2006, the Ministers of Trade and
Marine Affairs and Fisheries issued a joint decree to extend a ban
on shrimp imports for another six month period. Indonesian cellular
phone operator Telkomsel claimed on January 15 that the company had
become the 10th largest 3G telecommunication service provider
worldwide in terms of numbers of subscribers, only four months after
it launched 3G services in Indonesia. Ministry of Industry Director
of Multifarious Industries Nugraha Sukmajaya announced on January 18
that the GOI expects new investment of $125 million in the footwear
sector and a 15% increase in shoe exports to $1.8 billion in 2007.
End summary.

Exports Exceed $100 billion in 2006
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2. Indonesia's Central Bureau of Statistic (BPS) announced on
February 1, that Indonesia's total export value in 2006 rose to
$100.7 billion from $85.6 billion in 2005, an increase of 17.6%
year-on-year (YoY). Imports rose to $61.08 billion, a 5.9% YoY
increase from $57.70 billion in 2005. For the year, Indonesia had a
total trade surplus of $39.61 billion compared to $27.96 billion in

2005. Exports of fats and vegetable oil, particularly crude palm
oil, recorded the highest gain in value among non-oil-and-gas
exports in December 2006. Minister of Trade Mari Pangestu told the
press on January 18 that record world commodities prices -- such as
those for rubber and palm oil -- and some improvement in
manufacturing output contributed to the dramatic export growth in

2006. For the first 11 months of 2006, manufactured goods,
according to Pangestu, contributed 67.5% of Indonesia's non-oil and
gas exports. Moreover, Indonesian garment and textile exports
during the January-November period grew by 10.5%, footwear by 13.7%,
automotive components by 28.5%, and iron and steel by 79.8.


3. Pangestu further predicted that Indonesia's exports could grow
by up to 19% in 2007. She added that her ministry would continue to
encourage exporters to target prospective export markets, such as
the Middle East, where there is an ongoing construction boom. To
effectively compete for these markets, Pangestu said Indonesia must
improve its investment climate to further develop its export
manufacturing base.

Manufacturing Sector Shows Moderate Growth
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4. Ministry of Industry Secretary General Agus Tjahajana announced
on January 18 that Indonesia's manufacturing sector output expanded
7.9% in 2007. Rising private consumption, government expenditure
and construction sector investment drove the expansion. Agus noted
that manufacturing sector output grew by only 5% in 2006, below the
GOI's 6% official forecast, due to weak domestic demand and high
interest rates. Manufacturing growth in 2005 was just 4.6%. In the
past, Indonesia's manufacturing sector has been a key driver of
economic growth, with factories producing a range of products,
including textiles, footwear, iron and steel, and petrochemical
products. Analysts say labor rigidities, poor infrastructure,
regulatory and legal uncertainty, and security concerns have hurt
Indonesia's ability to compete for new investment with regional
competitors like China.

GOI Considers Abolishing Textile Decree
--------------


5. Ministry of Trade Director General for International Trade Diah
Maulida announced on January 15 that the GOI may abolish a
controversial Textile Decree. The regulation, according to Diah,
lacks a sound legal basis and is often the source of criticism from
other members of the World Trade Organization (WTO). However,
Coordinating Ministry of the Economy Deputy for Trade and Industry
Edi Putra Irawady on January 15 said that the GOI would maintain its
current trade policies for textiles in spite of calls for their
revision from a number of trading partners, including the United
States. According to Edi, in practice the regulation does not
restrict textile imports, and only imposes some additional
administrative procedures.

JAKARTA 00000368 002 OF 002




6. On October 22, 2002, the Minister of Industry and Trade issued
Decree No. 732/2002 concerning Textile Import Arrangements. Under
the Decree, only companies that have production facilities that use
imported fabrics as inputs for finished products, such as garments
or furniture, may obtain textile import licenses. The GOI has often
noted that the Decree is designed to curb smuggling, but an
increasing gap between GOI import statistics for fabrics and partner
country exports figures for those same items indicate that smuggling
remains prevalent.

GOI Extends Shrimp Import Ban
--------------


7. The Ministers of Trade and Marine Affairs and Fisheries issued a
joint decree on December 29, 2006 extending for another six months a
ban on the import of frozen and fresh shrimp into Indonesia.
Ministry of Marine Affairs and Fisheries Head of Statistic and
Information Saut Hutagalung on January 10 explained that an outbreak
of fish diseases and the continued prevalence of antibiotics in
shrimp produced in international markets compelled the GOI to extend
the ban. Hutagalung noted that the disease infectious myonecrosis
was discovered in shrimp in East Java in May 2006. Decrees No.
02/2006 and No.40/2006 ban the importation of the following species
of frozen and fresh shrimp: penaeus vanamae, penaeus monodon and
penaeus stylirosttris. However, the GOI continues to allow the
import of these species for research purposes.

Telkomsel's 2G Operations Grow
--------------


8. Telkomsel Operation Director Alan Ho told the press on January
15 that the state-owned telecommunications provider plans to build
more than 1,500 base transceiver stations across Indoensia (BTS) in
an effort to develop third generation (3G) services in the country.
According to Ho, Telkomsel, Indonesia's largest cellular phone
operator, ranks as one of the top ten 3-G providers worldwide in
terms of number of subscribers, only four months after it launched
the service in Indonesia. A subsidiary of state-owned
telecommunications company PT Telkom, Telkomsel had 1.7 million 3G
subscribers in January 2007, ranking it 10th out of the 159 3-G
providers worldwide. 3G service allows its users to combine voice,
text, pictures and video-streaming, plus broadband internet
connection, on mobile interfaces. Other licensed 3G operators in
Indonesia include Indosat, Excelcomindo, Hutchison CP
Telecommunications, and Natrindo Telepon Seluler.

$125 Million Investment in Footwear Sector
--------------


9. Ministry of Industry Director of Multifarious Industries Nugraha
Sukmajaya announced on January 18 that the GOI expects $125 million
in new investment in the footwear sector in 2007, as well as a 15%
increase in shoe exports to $1.8 billion. Nugraha said his optimism
is based on the expectation that Indonesian footwear export
producers will increasingly enter European Union (EU) footwear
markets with the EU maintaining trade sanctions on large producing
countries like China and Vietman. Nugraha added that Indonesia's
footwear sector remains promising, and he claimed that 16 companies
invested $80 million in the industry in 2006.

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Table 1: Indonesian Footwear Industries - Profile
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Number of companies 350 companies
Production capacity 1,123 mln pair
Capacity utilization 73.64%
Labor force 2005 392,000 workers
Labor force 2006 375,000 workers
Raw material 60% imported, 40% local
Exports value 2005 $1.43 billion
Exports value 2006 $1.60 billion

Source: Ministry of Industry

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