X-URL: http://www.usembassyjakarta.org/econ/high-low-econ.html
EMBASSY OF THE UNITED STATES OF AMERICA, JAKARTA, INDONESIA
ECONOMIC HIGHS AND LOWS: A NEW GOVERNMENT:
THE FIRST EIGHT WEEKS
SUMMARY AND INTRODUCTION
In October, Indonesia was immersed in the People's Consultative
Assembly (MPR) session, culminating with the selection of Muslim
cleric-turned-politician Abdurrahman Wahid (Gus Dur) as president and
popular favorite Megawati Sukarnoputri as vice president. The new
president's 35-member cabinet is one of compromise and reconciliation,
reflecting the diverse coalition that brought him to power.
The challenges facing the incoming government were immense. They
included grappling with political stability, economic recovery, and
"KKN" (corruption, collusion, and nepotism) issues. While authority
over East Timor was shifted to the United Nations, separatist
sentiment in Aceh and continuing sectarian violence in Ambon remained
major problems. On the economic recovery front, with the government's
release in early November of a partial PriceWaterhouseCoopers (PWC)
investigative report on the Bank Bali scandal, the International
Monetary Fund (IMF) and the GOI initiated discussions on a new
three-year program. The new government simultaneously explored how to
grapple with its legacy. It launched investigations into Soeharto's
wealth and use of power, individuals associated with the Bank Bali
scandal, and even a few new ministers. The Indonesian Bank
Restructuring Agency (IBRA) began publishing details on its largest
debtors, including Tommy Soeharto, Prayogo Pangestu, and Aburizal
Bakrie.
In addition to these high-profile developments, day-to-day economic
activity continued. The Ministry of Forestry and Plantations decided
to select an independent accounting firm to audit about 450 logging
concessions. Domestic automobile and motorcycle sales continued to
climb, while cement exports rose and domestic sales declined. Both
"white" and clove cigarette producers found fault with new regulations
affecting the cigarette industry. Indonesia's tourism sector showed
signs of recovery. End summary/introduction.
Table of Contents :
Maritime Ministry Established
Privatization
Foreign Investors Express Cautious Optimism
PT Telkom Profits Rise
Growth Spurts in Car and Cycle Sales
Rubber Association Hits the Skids
Logging Concessions to Undergo Independent Audit
Tainted Palm Oil Threatens Indonesian Exports
Cigarette Firms Decry New Regulations
Cement Industry Ups and Downs
Tourism Shows Signs of Recovery
Members of Indonesia's New Cabinet
MARITIME MINISTRY ESTABLISHED
The formation of the Ministry of Maritime Exploration and Fisheries
signaled the importance the new government attaches to Indonesia's
maritime richness. State Minister of Maritime Exploration and
Fisheries Sarwono Kusumaatmadja served as Minister of the Environment
from 1993-1998. The ministry is still defining its responsibilities,
assembling staff, and seeking adequate budget funding. Initial
indications are that the ministry aims to combat illegal foreign
fishing in Indonesian waters and facilitate the growth and
profitability of the domestic fishing industry. It wants also to stem
marine deterioration and damage caused by pollution and other
environmentally harmful practices.
PRIVATIZATION
During the first five months of the fiscal year starting April 1,
1999, privatization garnered Rp 7.2 trillion (about $1 billion at an
exchange rate of Rp 7,000 per dollar), or about 55 percent of the
GOI's target for the fiscal year. The GOI collected Rp 1.9 trillion
($271 million) from the sale of its shares in the Pelindo II port
management firm and Rp 1.5 trillion ($174 million) from the sale of
Pelindo III. Sales of the GOI's shares in PT Telkom totaled Rp 3.3
trillion ($471 million). Included in the privatization total are Rp
1.5 trillion (about $214 million) from the sale of Indofood shares.
Although Indofood is not a state-owned enterprise, the shares had been
pledged to cover owners' obligations to the Central Bank for emergency
liquidity support for their bank.
The FY 2000 (April-December, as Indonesia moves to a calendar year
fiscal year) budget is expected to contain a revenue target close to
that of this FY's, rupiah 13 trillion. The incoming Minister of
Investment and State-Owned Enterprises stated that he would review
privatizations conducted under the former government. Nonetheless,
several enterprises that were in the pipeline would continue to move
ahead toward the market.
INVESTOR EXPRESS CAUTIOUS OPTIMISM
Foreign and domestic investors appeared cautious but optimistic about
future investment in Indonesia. They were reassured by the new
government's credentials and its obvious legitimacy, required to
propel the country towards economic recovery. However, they remained
cautious about the new government's ability to grapple with security,
KKN (corruption, collusion, and nepotism), and contract issues.
Terms such as rule of law, transparency, and confidence-building are
fast becoming part of the lexicon of government officials. However,
the government faces the hard work of translating these concepts into
laws, regulations, and convincing oversight mechanisms. Investors are
also waiting to see how Indonesia resolves contract conflicts, such as
Standard Chartered Bank's arrangements to invest in Bank Bali and the
independent power producer (IPPs) projects with the state electric
company PLN. Debt restructuring and bank recapitalization must also
advance to restore investor confidence.
PT. TELKOM PROFITS RISE
Indonesia's domestic telecommunications monopoly PT Telkom reported a
net income of Rp 1.47 trillion for the first nine months of 1999, with
a net profit increase of 352 percent over the same period last year.
PT Telkom attributes the gain to three factors: 1) growth in operating
revenues - largely through its joint operation schemes (KSO) with
foreign and domestic partners; 2) a decrease in losses on foreign
exchange due to the strengthening of the rupiah (losses of Rp 227
billion -- versus Rp 1.6 trillion during the same period last year);
and 3) turn around of investment income from a net loss to a net gain.
Revenue from international calls increased 54 percent -- Rp 631
billion in comparison to Rp 409 billion during the same period last
year. Revenue from KSOs rose by almost 6 percent to Rp 1.25 trillion
in comparison to Rp 1.18 during the same period last year.
GROWTH SPURTS IN CAR AND CYCLE SALES
Domestic automobile and motorcycle sales continued to climb, partly
because declining interest rates made new auto purchases accessible to
more Indonesians. According to the Indonesian Automobile Industry
Association (Gaikindo), domestic automobile sales for the first ten
months of 1999 had already surpassed 1998 sales of 58,000 units.
Leading vehicle sales company PT Astra International -- occupying
almost 50 percent of the domestic market -- adjusted its projections
of 1999 domestic auto sales upward, from 45,000 units to 80,000 units.
The Association of Motorcycle Assemblers (PASMI) also reported that
domestic motorcycle sales for the 1999 third quarter increased 22
percent over sales from the same period in 1998. About 84 percent of
the sales (114,489 units) were of low-end, small cycles. In September
alone, PT Astra sold approximately 30,700 Hondas, or about 56 percent
of the units, while sales of Kawasaki, Suzuki, Yamaha, and Vespa
comprised the remaining 44 percent of sales. PT Astra recently
adjusted upward its estimates for motorcycle production and sales in
1999 -- from 420,000 to 450,000 units.
RUBBER ASSOCIATION HITS THE SKIDS
International Natural Rubber Agreement (INRA) members voted to
terminate INRA and its international body -- the International Natural
Rubber Organization (INRO)-- in late September. The withdrawal of
Malaysia, Thailand, and the inability or unwillingness of other
members to meet their buffer stock financing obligations made
INRA/INRO's continuation unsustainable. INRO members are slated to
meet once more in mid-December to deliberate the disposal of the
remaining buffer stock. Indonesian rubber prices climbed to $ .84/kilo
in early November from $ .65/kilo in early October. However, prices
dropped back to $ .67/kilo in early December.
During the International Rubber Study Group's (IRSG) October meeting,
the IRSG agreed to take on INRO responsibilities and projects, with
the exception of those involving INRO's buffer stock. The group also
elected Indonesian Dr. A. F. S. Budiman as its new Secretary General.
Dr. Budiman is director of the Indonesian Rubber Producers Association
(GAPKINDO). With the demise of INRO, IRSG is likely to assume a higher
profile in the global rubber industry.
LOGGING CONCESSIONS TO UNDERGO INDEPENDENT AUDIT
The Minister of Forestry and Plantations, Dr. Nuramahmudi Ismail,
announced on November 12 that his ministry would select an independent
accounting firm to audit about 450 logging concessions (HPH). Logging
concessions with clean records would be allowed to maintain
operations. Concessions with some problems would be given the
opportunity to improve their operations, while those with serious
problems could be ordered to close down. The minister listed several
difficulties facing the lagging industry: polarization between
investors/operators and local groups/interests; imbalance between the
demand of the forestry industry and the legal limits on log supplies;
and the increasing number of conflicts over property rights. The
minister pledged he would implement equitable law enforcement for all
parties and train ministry employees to implement ministry policies in
a clear and objective fashion.
TAINTED PALM OIL THREATEN INDONESIAN EXPORTS
In late September, a shipment of 19,000 tons of crude palm oil (CPO)
exported from North Sumatra to Rotterdam was found to be contaminated
with diesel fuel. The discovery triggered near-panic in the business
community in Medan, the North Sumatran capital, and demands for
immediate action from Jakarta. CPO is the lifeblood of North Sumatra.
In 1998, the province exported 872,000 metric tons of palm oil
products worth $357 million, or about 13 percent of total provincial
exports. Medan exporters expressed fear of a boycott of Indonesian
palm oil by the Netherlands, North Sumatra's largest export market, or
the European Union.
By mid-November, some 58,000 tons of suspected contaminated CPO had
been stopped by Dutch authorities. The pollution was eventually traced
to storage tanks at Belawan, Medan's port, owned by PT Deli Tama
Indonesia, (DTI) a subsidiary of the state-owned PT Perkebunan
Nusantara III, one of North Sumatra's largest plantation companies.
One alternative explanation floated in the press was that the
contamination resulted from attempts to cover up theft of CPO from
tanker trucks traveling between oil processing factories and the port.
Although hijacking of CPO tankers is known to occur in North Sumatra,
the volume of the diesel involved in this case (300 tons) and the
"suicidal" nature, as a local businessmen described it, of adding a
toxic substance to CPO tankers argued against this theory.
Reflecting his origins in another major agricultural exporting
province, South Sulawesi, newly-appointed Minister of Industry and
Trade Jusuf Kalla took quick action. In a November 9 letter he
described the central government's response thus far. This included a
complete cleaning of DTI's storage tanks at Belawan, the firing of
DTI's managing director and increased physical and lab inspection of
palm oil transported to the port. Also, the custom surveying company
PT Sucofindo would begin issuing "Certificates of Cleanliness"
attesting to the purity of Medan's CPO exports. Kalla's response
calmed the panic in Medan, but concerns remain. So far the Dutch have
declined to seek a council directive from Brussels that could result
in an EU-wide ban on imports of Indonesian CPO.
CIGARETTE FIRMS DECRY NEW REGULATIONS
Cigarette firms continued to complain about two new regulations.
Large-scale cigarette firms -- in particular producers of "white"
cigarettes (as distinguished from traditional clove cigarettes) --
protested Ministry of Finance Decree No. 124/kmk/o5/1999 imposing
excise tariffs based on a company's production capacity and setting
new minimum and maximum prices per stick. Under the new regulation,
machine rolled cigarettes are taxed at higher levels than hand rolled
sticks. The previous scheme determined excise tax according to price
per stick.
Clove cigarette producers also had something to complain about. The
Indonesian Kretek (clove) Cigarette Producers' Association (GAPRI)
continued to oppose a government regulation (peraturan pemerintah
81/99) restricting tar and nicotine levels in cigarettes to 20 mg and
1.5 mg, respectively. Current average tar levels for kretek cigarettes
are 60 mg and nicotine levels 3mg. The law, signed by former President
Habibie in early October, conforms to World Health Organization (WHO)
standards. Machine-rolled kretek producers will be allowed a two-year
grace period to modify their products to comply with the new
standards. Large hand-rolled producers will have five years and
smaller producers ten years to reach compliance. Violators will face
stiff penalties of up to $13,000 (Rp 100 million) and/or jail
sentences of up to five years. Light kretek and white cigarette
producers' tar and nicotine levels are already within compliance
levels. In mid-December, in response to GAPRI appeals, President Wahid
reportedly agreed to a review of government regulation 81/99.
Indonesia's cigarette industry is the country's second largest
employer after the civil service. Kretek production comprised about 89
percent of Indonesia's cigarette production in 1998, and kretek
producers directly employ over 6 million Indonesians. Indonesia's
cigarette industry is also a significant contributor to the national
purse: the industry contributed Rp 7.4 trillion in taxes and excise in
FY 1998/1999.
CEMENT INDUSTRY'S UPS AND DOWNS
An economic think tank predicts domestic cement consumption for 1999
will decline by 5 percent over 1998 levels (18.35 metric tons (MT) in
1999 vs 19.3 MT in 1998), while exports are expected to increase by
almost 260 percent (9.8 million MT in 1999 vs 3.8 million MT in 1998).
Three cement producers command 99 percent of the cement export market
and about 92 percent of the domestic market. Semen Gresik holds a 43
percent domestic market share, Indocement, 34 percent, and Semen
Cibinong, 15 percent. According to Indonesian Cement Association
statistics, domestic cement sales peaked in September 1997 when they
reached 2.2 million MT for that month alone.
Mexico-based cement multinational company Cemex owns 24 percent of
Semen Gresik, while the government holds 51 percent ownership, and the
public the remaining 25 percent. To date, Cemex efforts to obtain
majority ownership in Semen Gresik have not been successful. Private
PT Indocement Tunggal Prakarsa is also being wooed by foreign
investors. The world's third largest cement producer, Heidelberger
Zement AG (Germany), has the first option to buy the Salim group's
Indocement shares, conditioned on the completion Indocement's debt
restructuring by the end of 1999.
Of the three leading cement companies, Semen Cibinong owes the most
debt - an estimated $1.2 billion vs Indocement's $1 billion, and
Gresik's $407 million. A publicly traded company, sales of Cibinong's
shares on the Jakarta Stock Exchange (JSX) have been frozen since
August 1999 in response to doubts of the whereabouts of over $200
million in company funds.
TOURISM SHOWS SIGNS OF RECOVERY
The number of foreign tourists visiting Indonesia in 1999 could reach
5 million, according to Indonesian government predictions. Only 3.5
million foreign tourists visited the country in 1998, a decline of 31
percent from 1997. Bali remained a favorite destination for foreign
tourists. According to the Ministry of Tourism's regional office in
Bali, almost 1.2 million foreign tourists visited Bali from
January-October 1999 in comparison to about 970,000 during the same
period in 1998 -- a 21 percent increase. The number of tourists
visiting Bali from Australia and other Asean countries declined, while
the number of tourists from Japan, the Americas, the European Union,
and other Asia pacific countries increased. Despite these encouraging
reports, by December members of Bali's tourism industry were
complaining about lack of business.
Table I
Number of Foreign Tourists Visiting Bali
Region/Country
1999
1998
Percent
change
Japan
259,304
175,361
47
Americas
97,446
68,087
43
European Union
411,108
302,259
36
Other Asia Pacific
617,601
555,175
11
Australia
175,361
259,765
-20
Other Asean
23,088
33,101
-30
MEMBERS OF INDONESIA'S COMPROMISE CABINET
President Wahid's cabinet reflects the diversity of Indonesia's
political parties and interests and presents the challenges of a
coalition government. The 35-member cabinet includes:
A.)Coordinating Minister of Political Affairs and Security: General
Wiranto
Minister of Home Affairs: Lt. General (Retired) Surjadi Soedirdja
Minister of Foreign Affairs: Dr. Alwi Abdurrahman Shihab
Minister of Defense: Prof. Dr. Juwono Sudarsono
Minister of Law and Legislation: Prof. Dr. Yusril Ihza Mahendra
B)Coordinating Minister for Economics, Finance, and Industry: Drs.
Kwik Kian Gie
Minister of Finance: Dr. Bambang Sudibyo
Minister of Mining and Energy: Lt. General Susilo Bambang Yudhoyono
Minister of Trade and Industry: Drs. H. Yusuf Kalla
Minister of Agriculture: Dr. Muhammad Prakosa
Minister of Forestry and Plantations: Dr. Ir. Nurmahmudi Ismail
Minister of Communications and Transport: Lt. General Agum Gumelar
Minister of Marine Exploration and Fisheries: Ir. Sarwono
Kusumaatmadja
C) Coordinating Minister for People's Welfare and Poverty Eradication:
Basri Hassanuddin (the original incumbent, Dr. Hamzah Haz, resigned in
early December)
Minister of Manpower: Dr. Bomer Pasaribu
Minister of Health: Dr. Ahmad Suyudi
Minister of National Education: Dr. Yahya Muhaimin
Minister of Religious Affairs: Drs. K.H.M. Tolchah Hasan
Minister of Settlement and Territorial Development: Ir. Erna Witoelar
D) State Ministers
State Minister of Research and Technology: Dr. Mohammad A.S. Hikam
State Minister of Cooperatives and Small and Medium Enterprises: Drs.
Zarkasih Noer
State Minister of Environment: Dr. Sony Keraf
State Minister of Regional Autonomy: Prof. Ryaas Rasyid
State Minister of Tourism and Arts: Drs. H. Djaelani Hidayat
State Minister of Investment and State Enterprises Development: Ir.
Laksamana Sukardi
State Minister of Youth and Sports Affairs: Drs. Mahadi Sinambela
State Minister of Public Works: Dr. Ir. Rozik Boedioro Soetjipto
State Minister of Women's Affairs: Dra. Khofifah Indar Parawangsa
State Minister of Human Rights Affairs: Dr. Hasballah M. Saad
State Minister of Transmigration and Population: Ir. Al Hilal Hamdi
State Minister of State Administrative Reforms: Rear Admiral Freddy
Numberi
State Minister of Social Affairs: Dr. Anak Agung Gde. Agung
E) Others:
Attorney General: Marzuki Darusman
Commander of the Indonesian Military: Admiral Widodo AS
State Secretary: Dr. Ir. Alirahman
----- End of forwarded message from John A MacDougall -----