Icn-2007-12 - Economic Outlook 2008

8/4/2019 Icn-2007-12 - Economic Outlook 2008

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ISSN 0853-2086

INDONESIAN COMMERCIAL NEWSLETTER

MONTHLY REPORT

December 2007

PT DATA CONSULTBUSINESS SURVEYS AND REPORT

MARKET INTELLIGENCE REPORT ON

INDONESIAN ECONOMIC OUTLOOK 2008

Indonesian Commercial NewsletterSince 1978Published by PT Data ConsultFounder : Sulaeman KrisnandhiEditor-in-Chief : D. Ganjar SidikSenior Editors : - Hendrawan Tranggana

- Agustina R. Effendy


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List of Content

December 2007 - Indonesian Commercial Newsletter i

INDONESIAN COMMERCIAL NEWSLETTER

DECEMBER 2007

ECONOMIC OUTLOOK:

ECONOMIC OUTLOOK 2008........................................................................................1

General picture .............................................................................................................................1APBN contributes little to GDP growth .........................................................................................2Export performance improves with commodity price hikes .......................................................... 4Inflation in 2007, exceeding target................................................................................................6Outlook 2008................................................................................................................................. 7Indonesias economic prospects, 2008 ........................................................................................9

INDUSTRY OUTLOOK:

PROSPECTS OF MANUFACTURING SECTOR IN 2008...........................................10

Current issue-De-industrialization...............................................................................................10GDP growth by sectors...............................................................................................................11Transport equipment industry revived in 2007 ........................................................................... 12Metal industry takes advantage of high steel price in export markets........................................13Cement industry growing to follow revived of property sector in 2007 .......................................13Fertilizer and chemical manufacturing sector to grow at slower rate .........................................14Food, beverages and tobacco manufacturing sector .................................................................15Timber and forestry products sector...........................................................................................15Textile, rubber goods and footwear manufacturing sector .........................................................16Export of non-oil/gas boosted by high commodity prices ...........................................................18Realization of investment surges................................................................................................20Growth target manufacturing sector in 2008 ..............................................................................23

Textile industry expected to revive .............................................................................................24Motor vehicle industry expected to continue to grow..................................................................25Cement industry to grow by slower pace....................................................................................25Food, beverage and tobacco sector ...........................................................................................26Steel industry facing dumping prices..........................................................................................26Timber product industry..............................................................................................................26Paper and printed materials........................................................................................................27Fertilizer and chemical industry ..................................................................................................27Projection for 2008 by the government.......................................................................................28

AGRIBUSINESS:

AGRIBUSINESS..........................................................................................................29Current issue...............................................................................................................................29Agribusiness sector expanded 10.23% in 3rd Q of 2007 ............................................................30Prices of several agribusiness commodities expected to continue to scale up in 2008.............31CPO price is expected to rise to US$ 900 per ton......................................................................31Price of cacao .............................................................................................................................32Rubber price ...............................................................................................................................33Coffee price.................................................................................................................................34Prospects of agribusiness 2008..................................................................................................35


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ii December 2007 - Indonesian Commercial Newsletter

INFRASTRUCTURE:

PROSPECTS OF INFRASTRUCTURE AND PROPERTY SECTORS 2008.............37

TOURISM:

OVERVIEW AND PROSPECTS OF TOURISM SECTOR .......................................... 42

TELECOMMUNICATION:

OUTLOOK OF TELECOMMUNICATION INDUSTRY ................................................49

MINING:

PROSPECTS OF MINING COMMODITIES, 2008 ......................................................54

CORPORATE NEWS IN BRIEF:

Barito Pacific to acquire 70% of Chandra Asri............................................................................58Medco to team up with sheel upstream to develop CBM Deposits............................................58Indofood Group acquires Lonsum ..............................................................................................58Djarum Group to expand business to coal mining industry ........................................................58Etilsat acquires 16% stake in XL from Sondahk........................................................................59BII-Danamon Bank closer to merger ..........................................................................................59Bank Lippo and Bank Niaga heading for merger........................................................................59Polysindo to spend US$ 75 million in 2008 ................................................................................60ATPK acquires Otoma Global Mitra BII-Danamon Bank closer to merger.................................60Garuda doubles order for Boeing 737-800 NG...........................................................................60Rajawali to establish Cambodian flag carrier .............................................................................61Pertamina to build new oil refinery in East Java.........................................................................61

ECONOMIC NEWS IN BRIEF:

Implementation of investment 184% from target ........................................................................62Indonesian Airlines asked not to buy European aircraft .............................................................62Indonesia-Qatar joint venture to finance projects.......................................................................62More incentives offered to boost oil and gas explorations..........................................................63Investment in oil and gas sector predicted to rise 22.2% ...........................................................63Indonesia-Iran oil refinery project shelved..................................................................................63

APPENDICES:

Monetary indicators.....................................................................................................................64Banking indicators.......................................................................................................................65Economic Indicators....................................................................................................................66Export and import........................................................................................................................67Gross Domestic Product.............................................................................................................68Oil Price and Foreign Exchange.................................................................................................69The Indonesian Economic Trends..............................................................................................70

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ECONOMIC OUTLOOK

December 2007 - Indonesian Commercial Newsletter 1

ECONOMIC OUTLOOK 2008

General Picture

The Indonesian people entered the year 2007 with great expectation that thingswould be better than in 2006 when the economy was rocked by soaring oil pricesin the world market and increases in oil fuel (BBM) prices on the domesticmarket. The governments decision to raise the price of subsidized BBM inOctober, 2005 resulted in a slump notably in the manufacturing sector in 2006.

In 2007, the economic condition improved despite rising prices of crude oil to hitthe US$ 100 per barrel level. The inflation in 2007 was kept low as thegovernment maintained the prices of BBM, telephone and electricity tariffs.

Meanwhile, Bank Indonesia cut its benchmark interest rate contributing to revivalof the business sector.

In August-Sept. 2007 the worlds economy was jolted by the U.S. sub-primemortgage crisis causing a loss of billions of U.S. dollars to a number financialagencies in a number of countries. the world. Indonesia fared better. The countryand a number of other Southeast countries, which have experienced monetarycrisis in 1997 were better prepared to face the U.S. crisis.

However, the improvement of the countrys macro economic indicators conditionfell short of the peoples expectation and the business sector in particular. The

economic growth was not strong enough to reduce poverty and unemployment.Based on data in the first three quarter of 2007, the countrys economy wasestimated to grow 6.5% (y on y) and exports 13%.

Table - 1Economic indicators, 2006 2007 *)

Description 2006 2007*)1. GDP growth (%) 5.2 6.52. Growth of domestic demand (%) 5.3 5.43. Growth of private consumption (%) 3.0 5.34. Fiscal balance (% against GDP) (1.3) (1.2)5. Foreign debts (US$ billion) 128.7 136.9

6. Total foreign debts of the government 52.9 55.77. Foreign exchange reserve (US$ billion) 44.5 54.98. Foreign investment (US$ billion) 2.1 8.5

9. Current account (US$ billion) 1.6 1.910. Inflation rate (%) 7.0 6.611. Indonesian oil price (US$/barrel) 65.5 68.5

Note:*) up to QIII of 2007Source: BPS, BI,BKPM, Data Consult


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2 Indonesian Commercial Newsletter December 2007

APBN contributes little to GDP growth

In the first three quarters of 2007 the countrys GDP grew 6.52% stronger than

2006s growth of 5.48% in 2006.

The soaring prices of crude oil in the world market and the U.S. sub primemortgage crisis dragged down the countrys economic growth in 2007 Exportsgrowth fell short of target because of the U.S. crisis. The main driver of economicgrowth in 2007 was the consumption sector which expanded 5.29% in 2007.

Table 2GDP growth year-on-year by sectors

2004 2007(%)

Sector 2004 2005 2006 2007*)1. Household consumption 4.97 3.95 3.17 5.292. Government consumption 3.99 6.64 9.61 6.53

3.Gross domestic fixed capitalformation

14.68 10.80 2.91 8.83

4. Exports of goods and services 13.53 16.36 9.16 7.785. Imports of goods and services 26.65 17.07 7.57 8.15

Produk Domestik Bruto 5.03 5.68 5.48 6.52Source: BPS, processed

Indonesias GDP has for the past several years been sustained by the household

consumption sector and exports of goods and services. The worlds economiccrisis did not have direct impact on the countrys economy because of the highhousehold spending.

Meanwhile, the contribution of the governments consumption to the GDP growthhas declined. In 2007, the contribution of the governments spending to thecountrys GDP was 7.42% or down from 8.63% in 2006.

The decline in the contribution of the governments consumption was caused bylower growth of the development budget. Low realization of the state budget alsomeans the lower role of the state budget as and economic stimulant.

The finance ministry said by Nov. 30, 2007, state spending totaled Rp 535.5trillion or 72% of the amount set in the revised 2007 state budget of Rp 746.4trillion. Two weeks before the end of 2007, capital spending increased. Accordingto the finance minister, realization of the budget for capital spending wasestimated to reach 89.4% of the amount set in the revised 2007 state budget.The estimate was much higher than realization of 82.4% in 2006 and 60% in2005.


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Indonesian Commercial Newsletter December 2007 3

The realization was higher than expected as two weeks earlier the realizationwas only 83% of the target. The surge in the realization gave rise to suspects ofirregularities in the utilization of the state budget fund. The suspicion was mainlyin the realization of the special fund allocation (DAK), which turned out to havebeen fully disbursed amounting to Rp 17.094 trillion.

Table 3Contribution to GDP

(%)Sector 2004 2005 2006 2007*)

1. Household consumption 66.77 64.12 62.69 56.442. Government consumption 8.32 8.08 8.63 7.42

3.Gross domestic fixed capitalformation

22.45 23.61 23.97 22.33

4. Inventory change 1.61 0.99 0.59 1.905. Discrepancy of Statistics (3.82) (1.09) (0.68) 3.566. Exports of goods and services 32.22 33.61 30.88 47.117. Imports of goods and services 27.54 29.31 26.06 38.76

Gross Domestic Product 100.00 100.00 100.00 100.00Source: BPS

Sector Transport and Communications largest contributor to economic growth

The transport and communications sector has been the largest contributor to the

economic growth in 2007. That year, the sub-sector of aviation andtelecommunications was the largest contributor to the GDP growth marked withthe fast growing number of airlines and aircraft and a surge in the number ofmobile phone users.

In the first three quarter of 2007, the transport and communications sector grew12.52%, down slightly from the previous years growth of 13.6%.

The agricultural sector grew quite strongly by 8.9% in 2007 as against theprevious years growth of only 2.98%. The faster growth was attributable mainlyto the plantation sector (oil palm, and rubber). The prices of palm oil and rubbers

in the world market have soared in the past several years.

The manufacturing sector grew slower expanding only by 4.53% in 2007compared with 4.63% in 2006. The slower growth was caused by high productioncost.

The mining sector the grew in 2007 but with a slower rate compared with in 2006.


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Table - 4GDP growth by sectors,

2001 2007 (year on year)(%)

Sector 2004 2005 2006 2007*)1. Agriculture 2.82 2.66 2.98 8.902. Mining and quarry (4.48) 3.11 2.21 1.803. Manufacturing 6.38 4.57 4.63 4.53

4.Electricity, gas andwater supply

5.30 6.30 5.87 11.72

5. Construction 7.49 7.42 8.97 7.546. Trade, hotel, and restaurant 5.70 8.38 6.13 6.86

7.Transport andcommunications

13.38 12.97 13.64 12.52

8. Finance, leasing andcoporate services 7.66 6.79 5.65 8.02

9. Services 5.38 5.05 6.22 5.70GDP 5.03 5.68 5.48 6.52Non-oil/gas GDP 5.97 6.57 6.09 6.93Oil/gas GDP (3.52) (3.20) (1.27) 1.44

*) Growth y on y Q III 2007Source: BPS

Export performance improves with commodity price hikes

Export growth until November, 2007, fell short of the governments target of 20%.Exports in the first 11 months of that year grew only by 13.04% to US$ 103.1billion from the same period in the previous year. In the whole of that year,exports were estimated at only US$ 112 billion.

In the past two years, exports grew significantly. In 2006, exports grew 18.8% toUS$ 101.8 billion. The main contributors to the export growth included themanufacturing sector, notably palm oil and rubber industries.

The prices of a number of primary commodities including agricultural and miningproducts have increased to follow the soaring prices of crude oil in the worldmarket. The increases in the prices of the commodities contributed to rise in thecountrys exports.

In 2007, however, the growth rate was slowed with limited production capacity.Inadequate infrastructure mainly transport infrastructure also hampered exports.

The country is also facing dwindling reserves of minerals such as oil resulting indeclining production of oil in the past several years.


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Table 5Exports by sectors, 2000 - 2007

(US$ million)

Sector 2002 2003 20042005 2006 2007*) Growth

2007**)%

I. Non Oil/gas 45,946 47,406 55,939 66,429 78,814 83,533 16.221. Agriculture 2,568 2,526 2,496 2,880 3,309 3,551 15.432. Manufacture 38,730 40,880 48,677 55,594 62,432 68,758 16.633. Mining 3,744 3,996 4,761 7,947 11,264 9,843 14.034. Other sectors 4 5 4 8 9

II. Oil and Gas 12,113 13,652 15,645 19,232 22,789 19,541 1.181. Crude oil 5,228 5,621 6,241 8,146 9,821 8,145 10.452. Oil production 1,307 1,554 1,654 1,932 2,156 2,562 -2.683. Gas 5,528 6,477 7,750 9,154 10,812 8,835 -5.08

III. T O T A L 57,159 61,058 71,585 85,661 101,603 103,075 13.04

Note: *) Exports: Jan Nov. 2007**) % Change in January-Nov. 2007 from January-November 2006

Source: BPS, ICN

The high prices of oil have resulted in an increase the oil and gas earning. In thefirst 11 months of 2007, the countrys exports and imports of oil and gas werealmost equal with surplus of only US$ 75 million.

The trade surplus of US$ 35.57 billion in the first 11 months of 2007 came almost

all from non-oil/gas trade.

Table 6Trade balance, 2002 2007*)

(US$ million)

Description 2002 2003 2004 2005 2006 2007*

I. Including oil

and gas

1. Exports 57,159 61,056 71,584 85,660 101,603 103,075

2. Imports 31,289 32,551 46,524 57,70170,374 67,568

3. Surplus 25,870 28,505 25,060 27,960 31,229 35,507

II. Non oil/gas

1. Exports 45,046 47,407 55,939 66,428 78,814 83,5332. Imports 24,763 24,940 34,792 40,243 49,217 48,101

3. Surplus 20,283 22,467 20,147 26,185 29,597 35,432


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Table 6 contd

Description 2002 2003 2004 2005 2006 2007*

II. Oil and gas

1. Exports 12,113 13,649 15,645 19,232 22,789 19,5422. Imports 6,526 7,611 11,732 17,458 21,157 19,467

3. Surplus 5,587 6,038 3,913 1,774 1,632 75*) Exports & Imports Jan Nov 2007Source: BPS, Data Consult/ICN

Inflation in 2007, exceeding target

The countrys inflation in 2007 was 6.59% or higher that the governments targetof 6%. Foodstuff contributed 75% to the inflation of 1.1 month-on-month in

December. BPS said the prices of rice and wheat flour rose sharply in December.

Increase in the oil fuel consumption and natural disasters that crippled transportand distribution of goods in Central and East Java, also contributed to the rise ininflation.

The higher than expected inflation in 2007 caused concern making it an issuethat has to be addressed more seriously by the government in 2008. The highinflation in December forced the central bank to be more careful in takingmonetary decision. The central bank maintained its benchmark interest rate (BIRate) at 8% in its meeting in January after a cut in the previous monthly meeting.

In the 2008, state budget the BI rate is assumed to average 6%.

Table - 5Monthly inflation 2005 -2007

(%)Months 2005 2006 2007

Inflations Inflations InflationsJanuary 1.43 1.36 1.04February -0.17 0.58 0.62March 1.91 0.03 0.24April 0.34 0.05 -0.16May 0.21 0.37 0.10June 0.50 0.45 0.23July 0.78 0.45 0.72August 0.55 0.33 0.75Sept. 0.69 0.38 0.80Oct. 8.70 0.86 0.79Nov. 1.31 0.34 0.18Dec. -0.04 1.21 1.10Inflation rate 17.11 6.60 6.59

Source: BPS (Central Bureau of Statistic)


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According to the finance minister, the government sets inflation targets at 5%-6%in 2008, 4.5%-5.5% in 2009 and 4%-5% in 2010.

Outlook 2008

Oil Prices 2008

The oil prices in the world market have inched closer to the US$ 100 per barrellevel in entering the year 2008. The prices are expected to decline after thepeak of winter in the northern part of the world, but negative sentiments willcontinue to threaten the market that people should get used to living with highprices of oil. The prices of oil are forecast to continue to fluctuate but will hoveraround US$ 90 a barrel with sometimes hitting the record level of US$ 100 per

barrel.

High prices of oil may result in higher inflation and cause economic slowdown inthe world. However, analysts said as long as the oil prices are below US$ 120 abarrel, crisis could still be averted despite deep slump, but the worlds economywill most likely be succumbed to crisis if the prices scale up higher than US$ 120a barrel.

Economic projection by the government in 2008

The government as expressed both by the president and the chief economicsminister is optimistic that the countrys economy will be better in 2008 than in2007. Chief Economics Minister Boediono predicted that the countrys economywill expand by 6.5%-7%.

Boediono said amid the global economic slowdown and soaring oil prices, thereare still factors sustaining economic growth in 2008. He cited the composition ofexport commodities is easily affected by the global economic instability. TheIndonesian exports are dominated by commodities that are high in price anddemand. The global slump will affect exports in general but demands are stillstrong for major export commodities like coal, rubber and palm oil.

Another factor pushing up economic growth include is stronger investmentsector. Until the second quarter of 2007, approved investment projects increasedin number and value.

An increase in capital spending will also contribute to economic growth, in the2008 state budget capital spending is set at Rp 101.5 trillion.


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However, it would not be easy for the government to reach its economic growthtarget of 7% set for 2008 apart from external factor, internal factor could come asa stumbling block such as political heat ahead of the 2009 elections, naturaldisasters, which are especially more frequent in the country lately and inefficientdistribution system.

Prospects of Global Economy

A World Banks Report about Global Economic Prospects 2008 said the worldseconomic growth will tend to slow down as a result of the declining growth ofmajor economies notably the United States, which has been rocked by sub-primemortgage crisis. However, a strong growth will be recorded by emergingeconomies.

The worlds economy was estimated to expand by 3.6% in 2007, down to 3.3% in2008.

The World Bank estimated that the emerging economies grew by 7.4% last yearand the growth rate would fall to 7.1% in 2008. The United Nations also predictedslowdown in 2008 but developing nations will maintain high growth.

Based on the World Banks report, China and India will lead emergingeconomies. The two Asian giants will maintain strong growth in 2008. China ispredicted to expand by 10.8% in 2008 slower than an estimated 11.3% in 2007and India to expand by 8.4% in 2008.

With the expansion, overall, the economic role of developing nations will equalthe U.S. economic role in the world. Developing nations will have big contributionto the worlds economic growth and will help reduce the impact of the economicslump in the advanced nations on the global economy.

The report said the world economy will continue to face big challenges in thenew year.

First, a decline in the U.S. economy will result in a decrease in exports fromdeveloping nations. However, the sub-prime mortgage crisis in the United States

could still be controlled although it has jolted major financial markets in the world.The U.S. economy is expected to revive in 2009 with a growth of 2.3% and theworlds economy is forecast to expand by 3.9%.

Second, devaluation of the U.S. dollar will be a threat to the world economydestabilizing world trade and monetary market, and could cause a slowdown inexports and investment.


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Third, the effects of the oil price that recently hit the US$ 100 per barrel level ininternational future exchange market is feared to be worse. However, accordingto the World Bank report, higher prices of oil would reduce consumption. It isestimated that the prices of crude oil in 2008 and 2009 would fall gradually. Thereport said the average prices of crude oil exceeded US$ 84 a barrel in 2008and would fall 6.8% to an average of US$ 76 in 2009.

Meanwhile, World Bank economists warned against the danger of economicoverheating in developing countries. Slump in the United States may triggercapital flight form the words economy to developing nations causing largereconomic bubbles.

Indonesias Economic Prospects, 2008

The Indonesian economy was better in 2007 than in the previous year althoughthe improvement was not up to expectation. A number of economic indicatorsimproved in 2007 such as economic growth was higher than 6.5 year on year,inflation was lower at 6.6%, the BI Rate was cut to 8%, the rupiah was moreunder control at the level of 9,100 -9,400 per US dollar and exports grew by 13%though falling short of target.

Foreign investors also show greater interest as indicated by the increase in thevalued of investment approval and growing Gross Fixed Capital Formation(PMTB) In the third quarter of 2007, PMTB grew 8.8% (y-o-y), rising from 7.7%and 6.9% in the first and second quarters or much higher than the growth rate of

1.29% in 2006.

Expansion in the investment sector was reflected by improvement in constructioninvestment indicator such as in an increase in cement consumption and ininvestment credits. Realization of investment projects in the first nine months of2007 grew by 95.7% for foreign direct investment and by 164.5% for domesticinvestment. This indicates improved confidence of investors in the countryseconomy and the governments policies.

The Indonesian economy is predicted to improve in 2008 even if the crude oilprices will remain high at around US$ 100 a barrel. Indonesian economy is

sustained by its exports of primary commodities with prices higher to follow theoil price hikes offsetting losses cause by an increase in the oil prices. However, ifthe oil prices remain high, inflation might be more difficult to control. Inflationcould be as a high as in 2007 at 6.5% in the first quarter of 2008 or cut slightly to7.75% . The economic growth, therefore, is predicted to be slightly higher than in2007 at 6.5%-7% in 2008.

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Indonesian Commercial Newsletter - December 2007 10

PROSPECTS OF MANUFACTURINGSECTOR IN 2008

Current issues- De-industrialization

The manufacturing sector was the hardest hit by the 1997/1998 crisis. The sectorhas not yet fully recovered from the blow although a number of industries such asautomotive industry have almost fully recovered. Other industries are still in theprocess of recovery and some have even collapsed.

When the crisis struck many industries collapsed over huge debts with swellingrepayment burden as a result of the rupiah fall. Sectors such as banking,agriculture and mining have revived but the manufacturing sector remained in the

doldrums facing heavier challenges. Competition is sharper especially fromChina, which produces much cheaper products. Chinese products are morecompetitive not only in international market but they have also flooded theIndonesian market facing weak resistance from local products.

The surge in the prices of oil fuels in 2005 served another blow to the countrysmanufacturing sector. The production costs rose amid weakening purchasingpower of the people. Producers, therefore, could not raise their prices as buyerswould certainly chose imported products.

The prices of basic materials have also increased adding to the production cost.

A number of cacao-based food producers were forced to stop operation ondifficulty to secure the basic material. Cacao farmers and traders choose toexport their cacao beans as the prices were higher in international markets. It isironic that Indonesia, one of the worlds largest producers of cacao beans had toface scarcity in supply of that commodity forcing cacao processing factories toimport cacao beans from Malaysia.

Almost all industries were facing an increase in the prices of their basic materialsas a result of the prices of primary commodities like iron ore, nickel, copper, etc.Similarly the prices of farm products like cacao, crude palm oil, soybean andrubber have continued to climb.

Another factor weakening the manufacturing sector is lack of fund to financecapacity expansion or to restructure or modernize factories. Banks still hesitatedto disburse fresh fund for some sectors of the manufacturing sector. Forest-based, textile and footwear industries are still seen as risky sectors. Themanufacturing sector, therefore, could not share the benefit from a cut in bankinterest rates.


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Development of the manufacturing sector is also hampered by too much red tapeincluding illegal levies, which are still rife in the country. Meanwhile, there hasbeen no improvement in law enforcement. Investors still complained about legaland business uncertainties.

As a result the contribution of the manufacturing sector to the countrys GrossDomestic Products (GDP) has declined in proportion. The process of de-industrialization is in the offing marked by the decline in production capacity, lowinvestment, falling production and the closure of a number of factories as capitalflights.

Not everything, however, was bad for the manufacturing sector in 2007. Therewas progress shown in the investment sector. More foreign investors havereturned to the country to resume business including in the manufacturing sector.They began to invest in various business areas such as building material,

automotive, pharmaceutical and paper manufacturing. The country has regainedits position among major investment destinations in the world after thegovernment launched a series of policies offering incentives for foreigninvestments.

GDP Growth by sectors

In 2007, the manufacturing sector in the non-oil/gas sector grew moderately,even declined compared with in 2004. In 2004, the GDP from the manufacturingsector in the non oil/gas sector grew 7.51%. The growth rate fell to 5.85% in

2005 and to 5.27% in 2006. In 2007 it was slightly higher at 5.31%.

Altogether, the GDP growth in the manufacturing sector including in the oil/gassector was lower still in 2006 as a result of a decline in the oil and gas processingindustry to follow the soaring prices of crude oil and a decrease in the countrysproduction of crude oil. However, the condition improved in 2007 marked by a1.94% increase in the GDP in the oil/gas sector as against a decline of 1.22% in2006.

Table 1GDP growth by sectors, 2001 2007

( %)

No. Sectors 2004 2005 2006Q-III 2007

(cumulative)

(%) (%) (%) (%)

1AGRICULTURE, FISHERIES,ANIMAL HUSBANDRY & FORESTRY

3.26 2.49 3.0 4.3

2 MINING AND QUARRY -4.48 1.59 2.2 3.7

3 MANUFACTURING SECTOR 6.38 4.63 4.6 5.0

a. Oil and gas sector -1.95 -5.30 -1.22 1.94

b. Non-oil/gas sector 7.51 5.85 5.27 5.31


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Table 1 contd (%)

No. Sectors 2004 2005 2006Q-III 2007

(cumulative)

(%) (%) (%) (%)

4 ELECTRICITY, GAS & CLEAN WATER 5.22 6.49 5.9 10.3

5 CONSTRUCTION 7.49 7.34 9.0 8.3

6 TRADE, HOTEL AND RESTAURANT 5.69 8.59 6.1 7.4

7 TRANSPORT & COMMUNICATIONS 13.38 12.97 13.6 12.2

8FINANCE LEASING andCORPORATE SERVICE

7.70 7.12 5.7 7.9

9 SERVICES 4.85 5.16 6.2 6.5

GROSS DOMESTIC PRODUCT 5.05 5.60 5.5 6.3

Source: BPS

Transport equipment industry revived in 2007

The year 2007 was a year of revival for motor vehicle industry after a setback in2006 as a result of the oil fuel (BBM) price hikes in 2005 and high interest rates.Sales of motor vehicles increase after the inflation was put under control, andBank Indonesia cut its benchmark interest rate.

In 2006, car sales fell to 318,904 units. In the first 11 months of 2007 salesalready reached 395,315 unit exceeding sales in the whole of 2006. Theassociation of motor vehicle industry (Gaikindo) said sales in 2007 rose 36.23%to 434,499 units.

The high growth in car sales contributed to expansion of GDP in the transportvehicle, machine and equipment sector, which was the fastest growing industryin 2007 with a growth rate of 8.06%. However, in comparison with in 2005 and2004, the growth rate was 12.75% and in 2005 it was 12.4%. In 2006 it was only7.55%.

Amid the soaring fuel prices, car sales continued to scale up. By the end of 2007the price of crude oil hit the a new record high of US$ 100 a barrel. Thegovernment, therefore, planned to ban sales of subsidized BBM to private cars.The plan caused a decline in interest of consumers in buying cars with large CCcapacity.

The price of subsidized premium gasoline with octane content of 88 is Rp 4,500a liter. The price of non subsidized premium with octane content of 90 is aroundRp 6,500 per liter.

The government, however, put off the plan on public protest and forecast thatthe oil price would fell in 2008. Car market, therefore, was brisk again and salesare predicted to increase in 2008.


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Metal Industry takes advantage of high steel prices in export markets

Metal industry grew in 2006 but declined in 2007. The industry grew in 2006 withthe increase in the price of metal goods including steel in international market.

The export volume grew only slightly but the export value shot up in 2006. Thecountrys production of various steel products fell in 2006 but the value increasedwith rising prices.

However, in 2007, the countrys steel industry suffered a blow with large importsin cheaper prices flooding the domestic market. Local producers, therefore,accused foreign suppliers of dumping. Toward the end of 2007, the governmentslapped anti dumping import duty on hot rolled coil (HRC) of 19 suppliers fromChina, India, Thailand, Taiwan and Russia.

The HRC products sold with dumping prices in the country had weakened the

domestic industry. The countrys HRC products produced by state-owned steelmaker PT Krakatau Steel could not meet the imported products in marketcompetition. On the other hand the imposition of the anti dumping import dutyhas caused concern for HRC consumers in the country like producers of coldrolled coil (CRC) and galvanized iron sheet (GI sheet). They have to use moreexpensive basic material resulting in slowing growth of the countrys steelindustry.

The countrys steel industry is operating much below its installed capacity. OnlyHRC and steel slab industries operate at more than 65% of their capacity. GIsheet industry used only 34.16% of its installed capacity with production of

410,000 units in 2007.

The industry has an installed capacity of 1.2 million tons a year. Most steelfactories use old machines and are no longer efficient.

Imports of non standard galvanized iron sheet with a thickness of less than 0.2millimeter rose sharply by 33.3% to 200,000 tons in 2007 from 15,000 tons in2006. This year imports are predicted to rise further.

Cement industry growing to follow revival of property sector in 2007

Cement industry grew in 2007 after declining in 2006. In the first and secondquarters of 2007, cement consumption in the country grew 7.5% to 15.6 milliontons but the growth rate slowed later.

Based on data at the cement association (ASI), the countrys consumption ofcement in the first nine months of 2007 totaled 25.2 million tons, up 7.05% from23.5 million tons in the same period in the previous year.


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Consumption in September was the lowest in the third quarter of 2007 down2.4% to 3.11 million tons from 3.18 million tons in the same months in theprevious year.

ASI chairman Urip Timuryono attributed the decline in consumption in Septemberto long holidays during the Islamic Idulfitri celebration. Seeing the trend until thethird quarter, cement consumption in the country in the whole of 2007 wasestimated to reach 34 million tons or up 6.25% from 32 million tons in 2006.

In 2008, cement consumption is forecast to grow at a lower rate as a result of therising prices of fuel. ASI predicted that the countrys consumption of cement willgrow only by 5-6% in 2008.

Fertilizer and Chemical Manufacturing sector to grow at slower rate

Fertilizer, chemical and rubber goods sector, which contributed 12.49% to thecountrys GDP, grew only 5.2% in the QIII of 2007. In the whole of that year thesector was estimated to grow by 5.1%. The growth rate was lower than in theprevious two years.

In 2006, expansion of fertilizer industry was hampered over shortage in gassupply. A number of fertilizer factories suspended operation that year onshortage of supply of the basic material of urea fertilizer.

The problem continued through part of 2007. Almost all fertilizer plants suffered ashortage in gas supply mainly PT Pupuk Iskandar Muda and PT Pupuk Kujang.Petrochemical industry in East Java received gas only 60% of its requirement.As a result it was predicted that fertilizer and petrochemical production woulddeclined in 2007 Shortage in gas supply caused a problem not only for fertilizerand petrochemical industry but also for other manufacturing industries.

The expansion of the sector is also determined by demand from rubber goodsindustry including tire industry. Increase in car sales in the country in 2007contributed to increase in demand for tire and rubber, the price of which hasincreased in international market.

Meanwhile, exports of rubber in the form of crumb rubber is expected to continueto increase although with a lower rate in 2008 as a result of declining demandfrom China and the United States.

The price of natural rubber has remained high because of limited supplyingcapacity from producers. Demand for rubber in the world market begins todecline with a cut in imports by China.


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Industry Outlook


Meanwhile, oil-based petrochemical industry such as plastic basic materialindustry was confronted with the problem as a result of soaring prices of crudeoil. The soaring oil prices has caused an increase in production cost.

Food, Beverage and Tobacco Manufacturing Sector

The food, beverage and tobacco manufacturing sector still grew amid increasesin the prices of basic materials and fuel. The expansion of the sector wasattributable to growing consumption sector.

Toward the end of 2007, the prices of food basic materials surged such cookingoil, soybean and wheat flour. The food processing industry, therefore, suffered aslowdown.

Wheat flour-based food processing industry was in difficulty in maintainingproduction rate. Soybean-based food products such as soybean cake and tofu, apopular food products for low income Indonesians disappeared from the market.

The strong growth of crude palm oil industry offset the decline in the othersectors of the food manufacturing sector. The prices of CPO have continued toscale up. CPO exports, however, were curbed by high export tax imposed by thegovernment.

Timber and forestry products sector

There has been no progress made to revive timber industry. A big setback hasbeen experienced by plywood and other processed timber industries in the pastfive years.

The trend is heading toward total cessation of the existence of the industry if noconcrete cat is taken to improve the condition.

Main problems confronting plywood industry are as follows:

1. Shortage of log basic material resulting in large idle capacity.

2. Low efficiency as a result of old machines.3. Fund not available for restructuring.4. Decline in competitiveness facing products from China and Malaysia,

which are more efficient and use cheaper basic material in smuggled logsfrom Indonesia.

5. Rife illegal levies and weak law enforcement.6. Market prefers products with certificate.7. Plywood is timber product with low added value.


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Industry Outlook


The Indonesian Association of wood panel (APKINDO) had 130 members in2007 but only 68 of them remaining in operation with a total capacity of 6.1million cubic meters a year and of the 68 companies only 19 are operating

normally with production of 1.54 million cubic meters annually each. Theindustry, therefore, showed poor performance in general. In 2007, the countrysexport of wood panel totaled only 1.7 million cubic meters, down from 2 millioncubic meters in 2006.

The condition of the industry is not expected to improve significantly in the nearfuture. It would need large investment and long time for recovery. Old machineswill need replacement and the forest need replanting that will take a long perioduntil ready for harvest.

Textile, rubber goods and footwear manufacturing sector

Textile and textile product (TPT) industry is one of three largest contributors tothe countrys GDP in the manufacturing sector. However, the countrys TPTindustry is still struggling for recovery. Banks have not feel safe to disburse theirfunds for the industry. The industry is still seen a risky sector. However, exportsof TPT have increased despite its old and inefficient machines.

In 2007, the countrys TPT exports were valued at US$ 9.9 billion up from US$9.2 billion in the previous year. On the contrary sales on the domestic marketdeclined.

Based on official data of the Central Bureau of Statistics (BPS), imports of textilein 2006 surged 72.55% from 51,000 tons to 88,000 tons. Illegal imports weremuch larger. API said illegal imports of TPT also rose 69.35% in 2007 to 862,000tons valued at US$ 4.74 billion from 509,000 tons in 2006.

The imports of around 950,000 tons in 2007 including illegal imports, causedmarketing problem for local products. Based on data at API, sales of localproducts fell 42.9 % in 2007 to 270,000 tons from 456,000 tons in 2006.

API said local TPT producers had only a 45% share of the domestic market orworth Rp 1.45 trillion of the total market value of Rp 3 trillion in 2007. The marketshare fell by 5 percentage point from 50% in 2006 when the market value wasaround Rp 2.8 trillion.

Footwear industry began to revive in 2007. Exports of footwear rose from US$1.6 billion in 2006 to US$ 1.8 billion in 2007. The revival followed relocation ofsome factories form China and Vietnam to the country after the European Unionslapped anti dumping import duties of 24.7% on products from the two countries.


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The import duty on Indonesian product is only 14% in the EU. Exports offootwear are expected to rise further in 2008.

Table - 2

Growth of manufacturing sector in non-oil/gas sector,2004 QIII of 2007

No. Sectors 2004 2005 2006 2007*)(%) (%) (%) (%)

1. Food, beverage and tobacco 1.39 2.70 7.22 6.44

2.Textile, leather products &footwear 4.06 1.30

1.23 -2.16

3. Timber and forest products -2.07 -1.30 -0.66 -1.724. Paper & printed products 7.61 2.50 2.09 8.03

5.Fertilizer, chemical & rubberGoods 9.01 8.90

4.485.20

6.Cement & non metal quarryProducts 9.53 3.80

0.535.45

7. Base metal, iron & steel -2.61 -3.80 4.73 1.47

8.Transport vehicle, machine &equipment 17.67 12.40

7.558.06

9. Other goods 12.77 2.60 3.62 -1.33Total Industry 7.51 5.90 5.27 5.31

*) Q III 2007; Source: BPS

Transport equipment and food manufacturing industries are the largestcontributors to the GDP in the manufacturing sector. The two industriesaccounted for 60% of GDP in the manufacturing sector in 2007. In 2007, forexample, transport equipment industry contributed 33.4% and foodmanufacturing sector contributed 28.26%.

In 2007, the contribution of the two industries to GDP increased while thecontributions of other manufacturing industries declined. The contributions oftextile, leather goods and footwear sector fell from 11.6% in 2006 to 10.5% in2007. Similarly the contribution of the fertilizer, chemical goods and rubbermanufacturing sector dropped from 13.1% to 12.9%. See the following table.

Table - 3Contribution of each manufacturing sector to GDP

in the manufacturing sectorNo. Sectors Contributions (%)

2004 2005 2006 2007*)1 Food, beverage and tobacco 29.69 28.17 28.11 28.22

2Textile, leather goods &footwear 12.99 12.11 11.63 10.49


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Table 3 contd3 Wood & forest products 5.67 5.49 4.12 3.964 Paper & printed materials 5.63 5.37 5.43 5.12

5Fertilizer, chemical &rubber goods 11.60 12.16 13.13 12.95

6Cement & other non metalquarry products 3.96 3.91 3.45 3.39

7 Base metal, iron & steel 3.07 3.19 1.69 1.67

8Transport equipment, machines& equipment 26.47 28.65 31.62 33.44

9 Other goods 0.92 0.95 0.82 0.76Total 100.00 100.00 100.00 100.00

Note: *) QIII 2007Source: BPS

Exports of non-oil/gas boosted by high commodity prices

As was in 2006, when the domestic market was hit by slump, exports of nonoil/gas commodities notably manufactured products continued to grow though ata slower rate in 2007. Increase in the export value of various manufacturedproducts as a result of a surge in the prices of various commodities boosted theexports in 2007.

The export value of products of natural resources-based industry such asvegetable oils especially palm oil shot up to follow the soaring prices of the

commodities in international market In the first nine months of 2007, exports ofvegetable oils surged 44% from the same period in the previous year.

The prices of various metal products in 2007 remained high jacking up earningfrom the exports of non iron metal goods including nickel, copper, tin, etc. theprices of which rose more than 30%.

Similarly, exports of metal-based downstream products such as steel, machinesand automotive products grew year-on-year in the first three quarters of 2007 rising by almost 40%. Meanwhile, exports of steel products grew only 2.7%because of problem in competition. The countrys steel industry is less

competitive as most of the basic materials are imported when the prices of thematerial are high.

Textile products also are less competitive because of high prices of importedbasic materials amid strong competition in international market especially fromChina. In 2007, textile exports grew only by a range of 2% to 6%. Exports ofgarment rose 2.2%, exports of yarns and textiles by 6.2%. Despite the slowgrowth textile and textile products still a major contributor to the countrys foreignexchange income among the non-oil/gas commodities.


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Industry Outlook


Exports of electronic and electric appliances grew by a lower rate in 2007 after asharp increase in the previous year. On the contrary, demands on the domesticmarket was brisker in 2007 as a result of improved purchasing power of thepeople.

Table - 4Exports of main non-oil/gas products by commodities

(US$ million)SITC Description 2004 2005 2006 Jan-Sep. Jan-Sep. Growth

(%)28 Metal ore and

metal waste2,724.9 4,539.0 6,450.2 3,870.2 6,398.6 65.33

32 Coal, coke andbriquette

2,758.3 4,354.4 6,086.1 4,313.5 4,896.0 13.51

84 Clothes 4,454.2 5,106.4 5,760.5 4,390.3 4,488.8 2.2442 Vegetable oil

and fats4,216.3 4,764.0 5,714.6 3,839.4 5,548.2 44.51

23 Natural rubber &

synthetic rubber

2,212.7 2,614.1 4,375.6 3,350.6 3,572.2 6.61

77 Electricmachines, parts& equipment

3,193.4 4,003.0 4,039.4 3,077.3 3,251.5 5.66

65 Weaving yarns,textiles andtextile products

3,151.9 3,446.6 3,614.0 2,735.5 2,906.7 6.26

68 Non ferrousmetal

1,780.7 2,594.4 3,428.2 2,668.4 3,500.0 31.17

76 Telecommunications equipment

3,078.8 3,070.8 2,898.0 2,111.2 1,983.7 -6.04

63 Wood and softwood products

2,801.0 2,711.9 2,855.8 2,060.2 1,948.2 -5.44

64 Paper, carton &processed

products

2,181.7 2,277.7 2,801.7 2,106.9 2,414.6 14.60

75 Office equipmentand dataprocessingequipment

2,729.1 2,935.8 2,460.8 1,742.5 1,358.3 -22.05

51 Organicchemicals

1,620.2 1,635.2 1,983.0 1,300.3 2,118.7 62.94

03 Fish, mollusksand processedproducts

1,700.6 1,796.7 1,955.5 1,482.1 1,557.2 5.06

82 Furniture 1,669.3 1,856.1 1,876.0 1,374.9 1,488.4 8.2507 Coffee, tea,

cacao, spices1,144.1 1,479.9 1,807.2 1,356.8 1,427.7 5.23

78 Motor vehicles 964.9 1,355.3 1,700.2 1,228.0 1,576.5 28.38

89 OthermanufacturingProducts

1,408.8 1,481.7 1,652.1 1,244.0 1,494.9 20.17

67 Iron and steel 823.9 939.2 1,626.0 1,137.1 1,168.8 2.7985 Shoes and other

footwear1,320.5 1,428.5 1,599.8 1,231.6 1,230.0 -0.14

25 Pulp and paper 591.0 934.2 1,126.4 818.8 735.8 -10.1466 Non metal

mineral goods846.6 873.0 999.3 752.2 770.5 2.43

62 Rubber goods 683.2 817.1 986.1 746.8 862.9 15.55


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Industry Outlook


Table 4 contdSITC Description 2004 2005 2006 Jan-Sep. Jan-Sep. Growth

(%)74 Industrial

machines andequipment

591.3 760.8 880.5 673.3 746.1 10.81

57 Plastic materials 624.7 741.2 825.0 622.1 659.1 5.9471 Power

GeneratingMachines

573.3 668.3 780.2 576.8 624.9 8.34

Other 6,094.0 7,243.3 9,307.0 6,775.9 8,803.1 29.92Total 55,939.3 66,428.4 79,589.1 57,586.8 67,531.4 17.27

Source; BPS, industry ministry, ICN

Realization of Investment surges

A series of governments policies in the investment sector such as newInvestment Law and a number of governments decisions have boostedrealization of investment projects in 2007. Improvement in economic and politicalhas begun to attract foreign investors to Indonesia.

The Capital Investment Coordinating Board (BKPM) reported that based on thenumber of licenses it issued in the first nine months of 2007, there were 775foreign investment (PMA) projects valued at US$ 8,544.4 million implementedor up almost 100% from US$ 4.29 billion in the same period in 2006.

Implementation of domestic investment (PMDN) projects rose by almost 60% to

Rp 32.87 trillion in value from Rp 12.42 trillion in the same period in 2006.

In the nine months period in 2007, realization of the projects provided jobs for217,528 people including 78,736 in PMDN projects and 138,792 in PMA projects.

Table - 5Realization of PMDN and PMA projects, Jan.-Sept.- 2006-2007

P M D N /Domestic Direct Investment

Realization

1 Jan 30 Sept. 2006/Jan 1 Sept 30, 2006

1 Jan 30 Sept. 2007/Jan 1 Sept 30, 2007

# Projects InvestmentValue

(Rp. billion)


(Rp. billion)(4)

Realization of Investment(Permanent Licenses) 117 12,425.7

124 32,875.7

Jobs provided 49,322

persons78,735persons


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Industry Outlook


Table 5 contdP M A /

Foreign Direct InvestmentRealization

1 Jan 30 Sept. 2006/Jan 1 Sept 30. 2006

1 Jan 30 Sept. 2007/Jan 1 Sept 30. 2007


(US$ million)

# Projects InvestmentValue(US$

million)(4)

Realization of investment(Permanent Licenses)

702 4,291.4 775 8,544.4

Jobs provided 179,227persons

138,792persons

Source: BKPMNote:Not including investment in the sectors of oil and gas, bank, non bank financial agencies and

insurance, leasing in mining sector under contract of work , working contract, coal mining ,investment licensed by related institutions/sector , portfolio investment (capital market) andhousehold investment

P : Number of permanent licenses issuedI : Value of investment realization in Rp billion*) provisional figure, including permanent license issued by regional administrations

received by BKPM on Oct. 30, 2006

Based on the BKPMs report, in the first nine months of 2007, the largestinvestment was for paper, paper & plastic product manufacturing sector valuedat Rp 14.54 trillion in 8 projects, followed by food industry with investment of Rp

4.3 trillion in 19 projects, base metal, metal goods, machine and electronicmanufacturing sector with investment of Rp 3.52 trillion in 15 projects, food cropand plantation with investment of Rp 3.29 trillion in 16 projects and constructionsector Rp 2.11 trillion in four projects.

West Java had the largest PMDN projects with realization valued at Rp 11.21trillion in 30 projects, followed by Jambi Rp 4.47 trillion in 2 projects, Jakarta Rp3.82 trillion in 25 projects, Riau Rp 3.09 trillion in 11 projects and SoutheastSulawesi Rp 2.76 trillion in 1 project.

Table - 6

Realization of PMDN projects in Jan-Sept. 2007P M D N(Domestic Direct Investment)

# Project Value(Rp. Billion)

SectorPaper and Printing Industry 8 14,548.2Food industry 19 4,734.3Metal, machinery and electronic industry 15 3,522.4Food crops & plantation 16 3,293.0


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Table 6 contdP M D N

(Domestic Direct Investment)# Project Value

(Rp. Billion)Construction 4 2,110.7Chemical and pharmaceutical industry 10 1,119.2Other services 4 797.5Electricity, gas & water supply 5 743.6Mining 6 492.4Motor vehicles & other transport equip. ind. 5 287.7Textile industry 7 226.4Rubber and Plastic Industry 8 219.7Transport, storage & communication 4 206.1Animal husbandry/Livestock 1 145.2Trade & repair 4 141.3Non metallic mineral industry 2 124.2

Hotel & restaurant - 95.9Other industry 2 36.5Wood industry 2 19.8Leather Goods and Footwear Industry 1 8.5Fishery 1 3.1Forestry - -Medical, precisi.,optical instru., watch & clockindustry - -Real estate, Industrial Estate & business activities - -Total 124 32,875.7

Note: *) Until September 2007Source: Investment Coordinating Board

The largest foreign investment was in the transport, warehouse andcommunications sector valued at US$ 3,295.2 million in 35 projects, followed byinvestment in chemical and pharmaceutical sector valued at US$ 1,563.7 millionin 26 projects, food industry US$ 572.1 million in 45 projects, paper and printingUS$ 428.5 million in 10 projects and in trade and repairs sector US$ 411.8million in 235 projects.

Jakarta had the largest foreign investment with realization valued at US$ 4,383.4million in 276 projects, followed by East Java US$ 1,662 million in 54 projects,

West Java US$ 944.1 million in 196 projects and Banten US$ 236 million in 59projects.

Singapore led in the value of realization of investment projects in the first ninemonths of 2007 with investment of US$ 3,322.7 million in 90 projects, followed byBritain US$ 1,668.7 million in 58 projects, Japan US$ 535.6 million in 89 projects,Taiwan US$ 465.7 million in 27 projects and South Korea US$ 246.1 million in 133projects.


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Industry Outlook


Table - 7Realization of PMA projects

by sectors in 2007*)

Sectors# Project Value

(US$ million)SectorTransport, storage & communication 35 3,295.2Chemical and pharmaceutical industry 26 1,563.7Food industry 45 572.1Paper and Printing Industry 10 428.5Trade & repair 235 411.8Motor vehicles & other transport equip. ind 29 336.9Other services 100 312.2

Mining 26 300.9Metal, machinery and electronic industry 80 265.3Construction 13 207.9Food crops & plantation 12 158.4Hotel & restaurant 18 126.6Wood industry 13 125.5Rubber and Plastic Industry 26 116.5Textile industry 53 114.0Real estate, Industrial Estate &business activities 7 64.1Leather Goods and Footwear Industry 7 33.2

Other industry 21 29.5Non metallic mineral industry 5 26.8Fishery 4 24.3Animal husbandry/livestock 7 18.8Medical, precisi., optical instrument, watch &clock industry 1 10.9Electricity, gas & water supply 2 1.3Forestry - -Total 775 8,544.4

Note *) Until September 2007Source: (Investment Coordinating Board) BKPM

Growth Target for Manufacturing Sector in 2008

The manufacturing sector is predicted to grow faster in 2008 than in 2007, butwill not be as fast as in pre crisis period. The sector is forecast to expand by 7%-7.5% in 2008 or slightly higher than the countrys economic growth of 6.3%-7%projected for the year.


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Industry Outlook


Processing of locally produced primary commodities will remain the main driverof growth for the manufacturing sector in 2008. The prices of crude oil areexpected to be stable and tend to decline. The condition will contribute to

strengthening the purchasing power of the people in general and increase insales of manufactured products.

The slump that has hit the manufacturing sector in the past years was partlyattributed to old and inefficient factories. Restructuring, therefore, will be neededimmediately and restructuring will need large investment.

The government has taken steps to boost investment in the manufacturing sectorsuch as by seeking to improve investment and business climate. A newInvestment Law has been passed and a number of government regulations havebeen issued to attract investors. The government has also offered subsidizedfunds for textile companies to replace their factory machines.

In 2008, the manufacturing sector will face a new challenge in the form of globaleconomic slowdown resulting in sharp competition. The countrys manufacturingcompanies will face sharp competition not only in international market but also indomestic market. On the domestic market competition is sharp facing largeimported products sold at cheaper prices.

Textile Industry expected to revive

Textile and textile products (TPT) are among major contributors to the countrysGDP. TPT exports grew in 2007, but ironically sales on the domestic marketdeclined.

According to the Indonesia Textile Association (API) local TPT products hadonly a 45% share of the domestic market with sales valued at Rp 1.45 trillion ofthe total market value of Rp 3 trillion in 2007. The market share shrank 5percentage points from 50% in 2006 when the market value was Rp 2.8 trillion. Itis predicted that the market share of local TPT products will decline further in2008 with growing imports including illegal imports from China, Vietnam,Bangladesh and Europe.

Without restructuring, the countrys TPT industry will face greater difficulty inmarket competition both on the domestic and international markets. InNovember, the government and the House of Representatives already agreed tolaunch a program to revitalize the TPT industry. Under the program, thegovernment planned to disburse Rp 285 billion in subsidized credits for selectedtextile companies. However, the program was not fully successful Disbursementin 2007 totaled only Rp 195.639 billion or around 76.7%. of the total amount ofsubsidized credit offered by the government.


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Industry Outlook


The subsidized credits offered by the government is expected to encouragebanks to offer credits to the sector 10 times larger that investment in TPTindustry in 2007 was expected to reach a value of US$ 250 million. The increasein investment in 2007 is expected to increase TPT exports in 2008 to US$ 11.06

billion or a 10% increase from US$ 10.06 billion in 2007.

In 2008, the government plans to provide larger subsidized credit at Rp 400billion, and with bank loans investment in the TPT sector would reach US$ 500million. If the target comes to reality, the TPT industrialist will be able to buy newmachines to improve their efficiency and strengthen competitiveness. The TPTindustry, therefore, would grow by a higher rate of 5.5%.

Motor vehicle industry expected to continue to grow

A strong growth was recorded in 2007 by the countrys automotive industrymarked by increase in car sales from 318,904 units in 2006 to 432,000 units in2007 or an increase of 35.8%. Despite the strong growth, performance in 2007still was below that of 2005, when sales totaled more than 500,000 units.

The increase in sales in 2007 was attributable to a cut in interest rate an stablefuel prices after a surge in 2005 that caused a slump in 2006. In 2008, theautomotive industry is expected to expand further especially as the oil prices areexpected to fall to below US$ 100 a barrel and with improvement in the peoplespurchasing power.

If the prices of crude oil will not climb higher than the US$100 per barrel level,the government is expected not to go ahead with its plan to ban private car fromusing subsidized gasoline. Optimistic estimate puts the increase in car sales at10%-20% to 500,000 units in 2008.

The sales target is set on assumption that the crude oil prices to hover aroundUS$ 90 a barrel, the economy to expand by 6.3%, and the benchmark interestrate (BI Rate ) stable at 8%.

Cement industry to grow by slower pace

The gradual cut of the BI Rate especially since the third quarter of 2006 to reach8% in 2007, breathed new life to the property sector and in turn to the cementindustry.

Meanwhile, the government has an ambitious plan to build large infrastructureprojects including toll road, airport, seaport and power plants that will need largesupply of cement.


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Industry Outlook


In 2007, cement consumption grew 7.5% form 2006 despite a slowdown ingrowth in the last quarter of that year. In 2008, the growth rate is not expected ashigh as in 2007 as a result of the rise in the prices of fuel. The ASI chairman

predicted cement consumption will grow by 5%-6% in 2008.

Food, beverage and tobacco sector

In 2008, food processing industry will have to go over stumbling blocks that willlikely hamper its growth. On of the stumbling blocks is an increase in the pricesof basic material such as wheat flour, soybean, cooking oil, sugar, etc. The pricesof industrial fuels already increases in 2007 and are not expected to go down in2008.

In fact many small food processing factories have stopped operation. Foodprocessing industry has been one of a few industries that have survived a toughperiod in the wake of the 1997/1998 crisis . It has recovered faster that otherindustries . However the surge in the prices of basic materials is feared to placethe industry in a a more difficult situation in 2008. The industry is predicted toexpand by 5%-6% in 2008.

Steel industry facing dumping prices

The countrys steel industry was weakened by large imports sold at dumpingprices while the prices of basic materials remained high in 2007. The governmenthas slapped anti dumping import duties on those accused of dumping hot rolledcoil (HRC) on the domestic market. The measure, however, drew protest fromHRC consumers including producers of CRC, GI sheet, pipes, etc. Theycomplained about the high prices of the basic material.

In 2008, the countrys steel industry is facing uncertainty as those operating inthe downstream sector of the industry demand protection that they could facemarket competition. Demands for steel products are high and growing on thedomestic market with growing number of construction project in the infrastructureand property sectors, but the high prices of the basic materials in internationalmarket it is difficult for the steel industry to expand in 2008.

Timber product industry

It would be difficult for the country to regain its position among the worlds largestsupplier of processed products of tropical wood because of dwindling basicmaterial and inefficient factories.


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Industry Outlook


Although illegal logging and wood smuggling had been reduced, shortage insupply of log basic material remained unsolved in 2007 because of the extensivedamage to the forest. Plantation forests or industrial timber estates have beengrown only with the tree species specially to feed pulp industry.

The market prospects should improved for plywood with declining supply fromChina and Malaysia, which have relied more on smuggled logs from Indonesiafor basic material. Intensive anti illegal logging and smuggling by the governmentlately has reduced smuggling and illegal logging. The government has raised thefelling quota for forest concessionaires (HPH) to increase log supply for localtimber processing industries but not enough to revive the industry.

It is feared that more timber processing factories will collapse in 2008. Thosehaving greater chance to continue operation are companies using trees fromrubber plantations but they are not many.

In 2008, timber processing industry is forecast to grow only by 1.5%. Theincrease is expected with growing demand on the domestic market.

Paper and printed materials

Paper and printing industry grew fast in 2007 boosted by growing demand forpaper. The growing demand has boosted investment in paper industry especiallyby domestic investment (PMDN) companies.

Both PMDN and PMA companies showed greater interest in the sectors ofpaper, paper products and printing and base chemicals and pharmaceuticalsindustry than in other sectors in the first half of 2007.

Data at the Capital Investment Coordinating Board (BKPM) foreign investmentprojects approved by the government in the sectors of base chemical, chemicaland pharmaceutical products led in number -- totaling 20 projects valued at US$13.665 billion. Projects approved in the sector of paper, paper products andprinting industry followed with 8 projects valued at US$ 2.052 billion in the firstsix months of that year. In 2008, paper and printed material industry is predictedto expand by 8%.

Fertilizer and Chemical Industry

Fertilizer and chemical industry in 2007 suffered a setback with shortage insupply of gas feedstock. However, the industry grew though not as previouslyexpected. In 2008, the industry is expected to fare better as the government hasissued a policy to guarantee gas supply. A number of fertilizer factories such as


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Industry Outlook


Petrokimia Gresik have also established cooperation with gas producers. Thefertilizer and chemical industry is predicted to expand by 7% in 2008.

Projection for 2008 by the government

The industry ministry has set a growth target of 7.43% for the manufacturingsector in 2008. The target is set lower than 2007s growth target of 7.9%.

The industry ministry said food and beverage industry is projected to expand by8% in 2008 high than last years target of 7.12%; base metal and steel industryto expand by 5.5% higher than last years 2.5%; transport equipment, machineand equipment industry to grow by 9.6%, up from 2007s target of 9%.

Fertilizer, chemical and rubber goods sector is predcited to expand by 6.5%,higher than 2007s target of 5.1%; and cement and non metal quarry productsector is predicted to expand by 7% higher than 2007s target of 6%.

Meanwhile, lower growth targets set in 2008 include for paper and printedmaterial industry, which is predicetd to grow by 8% as against 2007s target of8.5% and timber product and forest product sector, which is forecast to grow by1% as against 007s target of 2%.

The non-oil/gas manufacturing sector is projected to contribute 25.5% to thecountrys economy this year and it is expected to remain the largest contributorto the economic development in the next 10 years.

Table - 8Projected growth of non-oil and gas sector

No. Sectors

2008Projection of

industryministry

(%)

2008Projection of

ICN(%)

1. Food, beverage and tobacco 8.0 5.52. Textiles, leather goods & footwear 3.5 4.5

3. Timber & forest products 1.0 1.54. Paper and printed material 8.0 8.05. Fertilizers, chemical & rubber goods 6.5 7.06. Cement & non metal quarry products 7.1 6.57. Base metal, iron & steel 5.5 5.5

8.Transport equipment, machinesand equipment

9.610.0

Source: Industry ministry, Data Consult/ICN

* * *


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AGRIBUSINESS

Indonesian Commercial Newsletter - December 2007 29

AGRIBUSINESS

Current Issue

In 2007, the performance of the agribusiness sector grew from the previousyear. The countrys production of crude palm oil CPO rose to around 14.1 milliontons from 14.1 million tons in 2006.

The oil palm plantation also expanded to 6.4 million hectares from 6 millionhectares in 2006. The expansion, however, was relatively slow over fear of beingcharged with damaging the environment.

Issue of environment has become more sensitive lately especially in the

European and U.S. markets. Indonesia and Malaysia have been accused ofdamaging forests to open new oil palm plantations. Palm oil products arerequired to have the certificate of Roundtable on Sustainable Palm Oil (RSPO)issued by an independent agency since late 2007.

However, only 10% of the 220 member companies of the Indonesian Associationof Palm Oil Companies (Gapki) have RSPO membership. The certificate isneeded to allow Indonesian CPO products to enter the international marketespecially the European and the U.S. markets. However, the requirement willmean an increase in cost.

The imposition of export tax on CPO and its derivatives of up to 10% inSeptember 2007 based on the international prices in Rotterdam has made thecountrys CPO products less competitive. Major buyers like Pakistan already turnto Malaysia for supply.

The prices of agribusiness commodities such as CPO, cacao, coffee and rubber,have continued to scale up in international market. The prices of CPO ininternational market has hit a peak level of US$ 900 per ton on rising demandincluding from bio fuel producers. CPO has been used as an alternative fuel amidthe soaring prices of petroleum.

The increase in the CPO price was also attributable to problem in supply fromIndonesia and Malaysia, which account for 90% of the worlds CPO supply. Asa result of long drought Indonesia could increase only production by 3%-4% in2007 much slower than normally 12% annually.

Demands for other major Indonesian commodities such as cacao, rubber andcoffee have also increased in the world market.


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Agribusiness sector expanded 10.23 % in 3rd Q of 2007

Generally a fast growth was recorded in the agribusiness sector in 2007 In he

third quarter of 2007, the sector grew 10.23% much faster than 3.4% in 2006 . Itwas also much faster than the economic growth of 3.91% in the same period.The expansion was mainly attributable to increase in prices of the agribusinesscommodities.

The increase in the prices of palm oil was caused by growing demand from biofuel industry and growing preference over other vegetable oils like soybean oil asfeedstock for cooking oil. Consumer began to turn away from soybean oil after itwas found to have a content of trans fat, which is dangerous to human health.

The price of natural rubber has also scaled up to follow the rise in the price ofsynthetic rubber, which is made of oil.

Table 1Growth of Indonesian agricultural sector

2004-2007 (YoY)

No. Sector 2004 2005 2006 QIII 2007(%) (%) (%) (%)

Farm, animal husbandry,forestry and fisheryes

3.26 2.49 2.98 10.23

Gross Domestic Product 5.05 5.60 5.48 3.91Source: Central Bureau of Statistics (BPS)

Palm oil, cacao, coffee and rubber are major export commodities and majorexport earners in 2007. The exports of the commodities have increased both involume and value.

In the first nine months of 2007, exports of palm oil reached 7,0 million tonsvalued at US$ 3,4 million and rubber exports totaled 2,8 million tons valued atUS$ 5,6 million.

Though declining in export volume, the export value of palm oil rose in 2007because of the price hike. Exports of palm oil declined in volume following theimposition of the export tax.

Table - 2Export volume and value of six agribusiness commodities

Jan-Dec 2006 Jan-Sept. 2007Commodities Volume

(Tons)Value

(000' US$)Volume(Tons)

Value(000' US$)

Primary plantation productsCoconut (Primary) 766,544 285,201 960,877 487,937Rubber (Primary) 1,738,573 3,309,248 2,839,009 5,690,656


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Table 2 contdJan-Dec 2006 Jan-Sept. 2007

Commodities Volume(Tons)

Value(000' US$)

Volume(Tons)

Value(000' US$)

Palm oil (Primary) 10,609,791 3,699,053 7,019,589 3,481,210Coffee (Primary) 326,912 449,091 215,543 427,308Cacao (Primary) 460,425 635,418 383,470 686,545Sugarcane (Primary) 386,508 37,134 108,045 6,716Other 36,502 19,504 343,677 795,806Total Primary products 14,325,255 8,434,649 11,870,210 11,191,608

Processed plantation productSugar-based food 53,118 98,144 39,948 75,089Rubber goods 187,429 488,666 286,370 793,399Subtotal processed products 240,547 586,810 326,318 874,488Other 111,413 382,271 70,386 226,445Total processed plantation

products 351,960 969,081 396,704 1,100,933Primary 14,325,255 8,434,649 11,870,210 11,191,608Processed 351,960 969,081 396,704 1,100,933Total exports 14,677,215 9,403,730 12,266,914 12,292,541

Source: BPS, Agriculture ministry, Data Consult/ICN

Prices of several agribusiness commodities expected to continueto scale up in 2008

CPO price is expected to rise to US$ 900 per ton

In 2008, the price of CPO will still be determined by the trend in the crude oilmarket. The price is forecast to reach US$ 900 per ton in 2008. Demand for CPOis predicted to continue to increase from China, India and Pakistan.

Meanwhile supplying capacity from Malaysia is expected to stagnate because ofthe difficulty in expanding plantations in that country. Limited availability of landhas prompted palm oil producers in that country to expand operation toIndonesia. Currently Malaysian investors own 15% of oil palm plantations inIndonesia.

The price of CPO on the domestic market is around Rp 7,180 per kg and he price

of fresh fruit bunches (TBS) has also increased to Rp 1,600 per kg from Rp1,450earlier.

In August, 2007, the government imposed export tax of up to 10% progressivelyon CPO base don the price of that commodity in Rotterdam.

Since the imposition of the progress export tax, CPO is less competitive in exportmarket. Pakistan has cut its imports from Indonesia of RBD stearin and


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RBD olein. It turned to Malaysia for supply as the price of the two palm oilproducts averaged US$ 902 per ton as against Malaysias US$ 820 per ton.Malaysia imposed export tax of 19% on CPO and 0% on its derivatives. Most

Indonesias exports of RBD stearin and RBD olein have been to India, Pakistanand China. The rest is to the European Union and 10% to Pakistan.

Table 3Export tax on CPO and derivatives, 2007

Prices of CPO (per ton) Export taxGroup II Group III

< US$ 550 0% 0%US$ 550 US$ 649 2.5% 1.5%US$ 650 US$ 749 5% 4%US$ 750 US$ 849 7.5% 6,5%

> US$ 850 10% 9%Source : Office of coordinating minister for economyNote :Group II = CPO, Refined Bleached Deodorized Olein (cooking oil), Crude

Olein, Crude Stearin, Crude PKO, Crude Kernel Stearin, CrudeKernel Olein

Group III = RBD Palm Kernel Oil, RBD Stearin, RBD Palm Oil

Price of cacao

The selling price of cacao FOB is around US$ 1,750 per ton or an increase of

10% early last year.

The price on the domestic market is around Rp 14,700 per kg for dry cacaowithout fermentation. The price of wet cacao is Rp 7,500-9,000 per kg. The priceduring the harvest time in June and July was even higher at Rp 18,000 per kg.

The cacao association (Askindo) estimated that production of cacao beans in2007 reached 630,000 tons up from 500,000 tons annually in the previous years.The production was smaller than Ivory Coasts 1.3 million tons and Ghanas650,000 tons a year. The productivity in Indonesia is low -- 600-800 kg perhectare a year. The productivity could still be improved to 1.5 to 2 tons per

hectare.

Smallholders plantations account for 87% of the countrys production of cacaobeans. Indonesia produces 150,000 tons of processed products of cacao a year.Malaysia with cacao bean production of only 60,000 tons a year could turn out300,000 tons of processed products of cacao. Indonesia needs to import 300,000tons of fermented cacao beans and 24,000 tons of cacao powder to feed itscacao processing industry.


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Indonesian cacao beans could not yet compete well with foreign products suchas Malaysia as Indonesian cacao beans are not fermented. The price offermented cacao beans is higher. Malaysia buys raw cacao beans at a price ofUS$ 200 per ton from Indonesia. The beans are then fermented and processed

into powder that will sell at US$ 600 US$ 1000 dollar per ton.

The government regulation also does not encourage development of cacaoprocessing industry in the country.

The import duty on processed products of cacao is only 5%. Malaysia is moreprotective on its industry imposing a 25% import duty on processed products ofcacao.

Askindo said it will encourage fermentation of cacao beans to be morecompetitive in international market. Farmers are reluctant to do fermentation as

the process will take quite long time of more than 5 days.

The government will require Indonesian cacao beans for export to meetIndonesian National Standard with one-year transitional period in 2008.

Rubber price

The price of natural rubber reached US$ 228 per ton in 2007. The price of rubberremained high in 2007 as supply fell from Thailand, which is the worlds largestproducer and Indonesia, the worlds second largest producer. Demands are

strong especially from China, the United States, South Korea and India.

Farmers selling price for rubber rose to Rp 6,000 Rp 7,000 per kg in 2007from Rp 4,500 Rp 5,500 per kg in 2006. The price hike encouraged the farmersto start replanting.

The agriculture ministry said around 400,000 hectares of rubber plantations needreplanting that will cost around Rp 3.52 trillion. Indonesia, however, has ashortage of 20 million high yield seedlings every year. Currently producers ofhigh yield seedlings could produce only up to 50 million seedlings as againstannual requirement of 70 million.

Indonesia has the large rubber plantations in the world totaling 3.33 millionhectares. They include smallholders plantations making up 84.5%, stateplantation 7.3% and private companies plantations 8.2%. Rubber plantations arefound in 15 provinces including Nanggroe Aceh Darussalam, North Sumatra,Riau, Jambi, Bangka Belitung, Bengkulu, West Kalimantan and EastKalimantan.


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Indonesias rubber production was estimated to reach 2.9 million tons in 2007, upfrom 2.6 million tons in 2007.

Indonesia, however, is only the second lather producer after Thailand, whichproduces around 3 million tons of that commodity. The third largest is Malaysia.

Difficulty in securing rubber supply is reflected by the high price of thatcommodity. In North Sumatra and other producing regions, the selling price ofprocessed rubber from farmers rose to Rp 16,400 Rp 16,600/kg from Rp16,000 earlier.

Coffee price

The price of coffee in international market averaged US$ 1,900 per ton, up fromUS$ 1,850 earlier.

Indonesias coffee production was estimated to reach 550,000 tons in 2007,down from 653,400 tons in 2006. The decline was caused by long drought since2006.

In the coffee year ending September 2008, the production is predicted to reachonly 450,000 tons. Indonesia is the fourth largest producer of coffee in the worldafter Brazil, Colombia and Vietnam.

The productivity of coffee plantations in the country is low around 500 kg 700kg per hectare, and the quality is low because of poor maintenance system byfarmers, who dominate the plantations.

Although the price of that commodity increased in the world market, the countrysexports fell in 2007, partly because of growing domestic consumption to 150,000tons from 120,000 tons in the previous year.

In North Sumatra and Aceh coffee exporters suffered losses as their purchasingprices were higher than the export prices. Many exporters were forced to buycoffee at high prices to meet contracts with their buyers abroad.

The price of Arabica coffee at the Belawan port of North Sumatra, was around3.10 U.S. cents per kg or around Rp 28,000 per kg.

Coffee plantations in the country totaled 1.26 million hectares. Smallholdersaccount for 95.8% and private companies plantations making up 2.1% and stateplantation 2.1%.


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Prospects of Agribusiness 2008

Palm oil

- Demand for CPO is predicted to continue to rise especially with growingdemand from biofuel producers.

- GAPKI said the countrys CPO production is expected to reach 18.5million tons in 2008. The increase is boosted by CPO price hikes andimprovement in productivity of plantations.

- Indonesia plans revitalization of 1.5 million hectares of oil palm plantationsin 2007-2012 to increase productivity.

- Investors still show strong interest in oil palm plantation. Currently the

private sector owns 53% of oil palm plantations in the country. The CapitalInvestment Coordinating Board has granted license for 14 companies toopen oil palm plantations expected to operate in 2008-2011. Six of thelicensed investors are foreign companies with a total investment of US$175.7 million. The new investment is expected to increase the countrysproduction capacity by 867,200 tons of CPO a year.

- Indonesia exports 65% of its CPO production with more than 150countries of export destination including China, India, Malaysia, Singaporeand the Netherlands.

Cacao

- Indonesia plans to revitalize 200,000 hectares of cacao plantations in thenext five years (2007-2012) to increase productivity. In 2010, the countryscacao plantations are predicted to expand to 1.1 million hectaresproducing 730,000 tons of cacao beans a year.

- In 2025, Indonesia hopes to become the worlds largest producer of cacaobeans when plantations are predicted to expand to 1.35 million hectaresproducing 1.3 million tons of cacao beans a year.

- Indonesia still has wide land of more than 6.2 million hectares suitable forcacao plantations in Papua, East Kalimantan, Central Sulawesi, Malukuand Southeast Sulawesi. The productivity of the existing plantations couldstill be improved from now less than 50% of ideal productivity. Theproblems faced by cacao exporters is poor quality.


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- Latest research shows that flavanol content of cacao is good for thehearth negating previous suspect that cacao bean has high content ofcholesterol.

Rubber

- The International Rubber Study Group (IRSG) said the worldsconsumption of rubber would reach 23.7 million tons in 2007 and willrise further to 24 million tons in 2010. The figure shows that theopportunity is still wide open for Indonesia to increase its output.

- In order to increase productivity the government will revitalize 300,000hectares of r

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