INDONESIA ECONOMY AND ITS IMPROVED COMPETITIVENESS

Mahendra Siregar

Vice Minister of Trade

Republic of Indonesia

Business Forum

Taipei, July 9, 2010

1

Asia Leads the World Economy Out of Recession

2

World OutputWorld Output

Source: World Economic Outlook, IMF

-10%

-5%

0%

5%

10%

15%

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2006 2007 2008 2009 2010 2011

World Advanced economies Emerging economies

3

Asia Asia GDP GrowthGDP Growth

Note : green column is estimated

Indonesia GDP growth forecast remain increase for the next five years ….

(6.00)

(4.00)

(2.00)

-

2.00

4.00

6.00

8.00

10.00

12.00

14.00

2007 2008 2009 2010 2011 2012 2013 2014

China India Indonesia Korea Malaysia Philippines Thailand

% Country 2007 2008 2009 2010 2011 2012 2013 2014

China 13.01 9.01 8.50 9.03 9.73 9.84 9.77 9.51

India 9.37 7.35 5.36 6.42 7.28 7.63 7.99 8.08

Indonesia 6.28 6.06 3.99 4.75 5.00 5.50 6.00 6.30

Korea 5.11 2.22 (0.99) 3.55 5.20 4.97 4.66 4.54

Malaysia 6.18 4.63 (3.63) 2.52 4.05 5.50 6.00 6.00

Philippines 7.08 3.84 0.99 3.21 3.80 4.50 4.50 4.50

Thailand 4.93 2.59 (3.46) 3.71 4.50 5.00 6.00 6.00 Source: International Monetary Fund, World Economic Outlook Database, October 2009

4

The “Factory East Asia” Some are member

of the 20 largest economies in the world

East Asia (excluding Japan) exported US$3.5 trillion of goods, more than one-fifth of the World’s exports

East Asia region itself is a market of approaching 2 billion people;

Map 2: Intra-Asian Trade Flows, 2004

Source: IMF Direction of Trade Statistics.

Source: Gill, Kharas (2006)

5

Trade Integration in Asia Differs with Europe

Source: staff calculation from UN-COMTRADE

Trade integration in Asia is unique;

More than 70% of East Asia exports growth are manufacturing products in which machineries, electronics and transport equipment contribute more than 3/5;

Drivers of Intra-Regional Exports Growth (1995-97 to 2005-07)

-10

0

10

20

30

40

50

60

70

EA-Japan EU

%

Agriculture materials, fishery, food Mining, minerals

Oil and gas Chemicals

CTF Electronics, machinery, transp

Other manufactures

6

The Asian noodle bowl*

Jagdish Bhagwati invented “spaghetti bowl” to illustrate thecomplexity web and rules of free trade agreements which is proliferating

Brunei Darussalam

Cambodia

Thailand

Malaysia

Philippines

Myanmar

Lao PDR

Vietnam

Indonesia

Singapore

A S E A N

ASEAN Free Tr ade Agr eemen t

China

Australia

New Zealand

Chile

Japan

Korea

Canada

Mexico

India Sri Lanka

Qatar

Panama

Peru

Kuwait

United States

European Free Trade Association

Hong Kong, China

FTAs under negotiation

Source: Haddad (2007)7

Almost all have trade deficits with China

Source: ASEAN Secretariat 8

But increasing surplus with all other trade partners

Trade surplus (billion $)

Source:UN-COMTRADE9

Updates on Indonesia Economy

10

11

Indonesia GDP Growth 2005 – 2010Consumption and Government Expenditure Replace by Trade and Investment

Expenditure 2005 2006 2007 2008 2009Q-I

2010

Household Consumption 3,9 3,2 5,0 5,3 4,9 3,9

Government Consumption 8,1 9,6 3,9 10,4 15,7 -8,8

Gross Fixed Capital Formation

9,9 2,9 9,2 11,7 3,3 7,9

Export of Goods and services

8,6 9,2 8,0 9,5 -9,7 19,6

Reduced Imports of Goods and Services

12,35 7,6 8,9 10,0 -15,0 22,6

Gross Domestic Product 5,6 5,5 6,3 6,1 4,5 5,711

Indonesia Indonesia has has Diversified Exports Diversified Exports DestinationDestinationShare of Exports by Country in 2000 Share of Exports by Country in 2009

Indonesia has succeeded in export market diversification. In 2000 the contribution of the top five countries of destination was amounting to 59%. The figure fell to 51% in 2009.

Diversification of export destination countries has to be continued in order to reduce too much dependence on a small number of countries.

2000

Japan23%

USA14%

Singapore11%

Korea7%

China4%

Others41%

2009 (annualized)

Japan

16%

USA

9%

Singapore

9%

Korea

7%China

10%

Others

49%

Source: Indonesia’s Central Board of Statistics

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Indonesia Export Products DiversifiedIndonesia Export Products Diversified

Source: BPS (processed by TREDA)

10 Main Products

51%

Other Products49%

Jan-Feb 2009

10 Main Products

45%Other Products

55%

Jan-Feb 2010

101.9

36.2

34.6

30.2

29.2

20.0

15.7

13.3

-10.6

-28.6

Growth (%)

582.2

1,021.4

1,100.2

179.8

1,125.3

279.8

304.2

1,459.7

145.5

103.0

1,175.5

1,390.9

1,480.9

234.1

1,454.0

335.9

352.0

1,653.9

130.1

73.6

RUBBER&RUBBER PRODUCT

FOREST PRODUCTS

OIL PALM

COCOA

ELECTRONICS

AUTOMOTIVES PRODUCT

FOOTWEAR

TEXTILE'S

SHRIMP

COFFEE

Value Export (US$ Million)Jan-Feb '10Jan-Feb '09

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ImportImportss reflect investment reflect investment picking uppicking up

Source: BPS (processed by TREDA)

Consumption goods

7%

Raw materials73%

Capital goods19%

Jan-Mar 2010

Consumption goods

8%

Raw materials78%

Capital goods15%

Jan-Mar 2005

14

Effective Policy Responses in 2010

15

Fiscal Incentive to Support Real Sector 20101. Incentive on Taxation

• Income tax rate decrease 3% and 5% further and for listed companies in ISX

• Non-taxable primary agriculture product

• Abolishment part of Luxury Tax• Income tax facilities for special

industry and location.

2. Energy• Geothermal: Income Tax, VAT and

Financing• Oil and Gas: VAT exploration• Bio-energy: Subsidy and VAT• Govt. guarantee: Electricity 10.000

MW (phase I and II)

3. Infrastructure• Funding for land acquisition and land

capping• Operational funding for Infrastructure

Fund and Guarantee Fund• Guarantee for State Water Company

and clean water subsidy• Housing Finance

4. Trade and Industry• NSW enactment, 24/7 services

in major terminals, and import early warning

• Import duties -DTP special industry

• Import duties 0% for capital goods

• Revitalization fund for plantation and sugar refinery industry

5. Other Sector – Local• Incentive for local government

(Unqualified Opinion and Local budget submission)

• Bureaucracy Reformation Fund for 11 ministries/institution (laws, finance and national security)

• Capital injection for Indonesia Exim Bank and Indonesia Credit Insurance Company

16

Fiscal Policy to Promote Economic Recovery Fiscal policy aims to promote economic recovery by providing tax incentives to various sectors and businesses which further promotes private consumption and investment spending

Fiscal Policy for 2010 to Promote Economic Recovery

Incentives on General Taxation

Reduce income tax rate for corporations from 28% to 25% Reduce income tax rate by 5% for listed companies with 40% public ownership Provide income tax facilities for businesses in specific industries or areas Free VAT for primary agriculture products Eliminate many luxury tax items Provide tax and custom incentive for special areas in accordance with law on tax and

customs Eliminate non tax revenue for export and import documentation

EnergyIncentives

Provide incentive for geothermal energy through income tax and VAT

Provide tax incentive on imports (both income tax and VAT on imports) for the oil and gas exploration sector

Provide incentive for green energy through VAT and subsidy

Incentives for Industry

Provide custom incentives for selected industries

Provide custom incentives for imported capital goods and capex

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Fiscal Policy to Enhance Indonesia’s CompetitivenessThe Indonesia government continues to support the development of infrastructure and enhance social welfare through effective fiscal policy and incentives for specific sectors

Infrastructure Development and Social Welfare

Guarantee for 10,000 MW electricity program and IPP Additional funds for land clearing for toll road building Guarantee obligation for State Water Company; subsidy on interest for clean water, and interest

credit for State Water Company Subsidy and VAT for people’s housing (low income housing)

Assistance to Support Specific Sectors

Credit for green fuel development Credit for farming and cow growers Subsidy for fertilizers, seeds and inventory Direct assistance for seeds at competitive price in order to revitalize plantation for cocoa and

sugar industry Additional capital for Indonesia Exim Bank to finance export related activities, including for SMEs Provide incentives for high performance regions (e.g. performance on financial, economic and

social welfare) Resolution for troubled asset at SOEs, and SMEs loans

Fiscal Policy for 2010 to Enhance Indonesia’s Competitiveness

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Bilateral Trade Relations

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Balance of Trade Between Indonesia - Taiwan

2005 2006 2007 2008 2009 2009 2010

EXPORT 2,474,817 2,734,618 2,596,350 3,154,455 3,381,872 100.00 7.98 250,264 652,980 100.00 160.92

PETROLEUM AND NATURAL GAS 689,127 449,988 258,936 253,521 506,639 14.98 - 28,050 190,495 29.17 579.13

NON PETROLEUM AND NATURAL GAS 1,785,691 2,284,629 2,337,414 2,900,933 2,875,233 85.02 12.65 222,214 462,484 70.83 108.13

IMPORT 1,338,071 1,322,080 1,495,326 2,850,042 2,393,224 100.00 21.30 295,160 498,724 100.00 68.97

PETROLEUM AND NATURAL GAS 129,478 184,394 55,608 136,115 384,917 16.08 20.63 22,057 75,358 15.11 241.64

NON PETROLEUM AND NATURAL GAS 1,208,593 1,137,687 1,439,718 2,713,927 2,008,307 59.38 20.74 273,102 423,367 64.84 55.02

BALANCE 1,136,746 1,412,537 1,101,024 304,413 988,647 100.00 -16.59 (44,896) 154,255 100.00 -443.59

PETROLEUM AND NATURAL GAS 559,648 265,595 203,328 117,406 121,722 12.31 -32.07 5,992 115,138 74.64 1,821.39

NON PETROLEUM AND NATURAL GAS 577,098 1,146,943 897,696 187,007 866,926 87.69 -9.51 (50,888) 39,118 25.36 -176.87

TOTAL TRADE 3,812,888 4,056,698 4,091,676 6,004,497 5,775,096 100.00 13.00 545,423 1,151,704 100.00 111.16

PETROLEUM AND NATURAL GAS 818,605 634,382 314,544 389,637 891,556 15.44 -3.12 50,107 265,853 23.08 430.57

NON PETROLEUM AND NATURAL GAS 2,994,283 3,422,316 3,777,131 5,614,860 4,883,540 84.56 15.88 495,316 885,851 76.92 78.85

III

IV

% TREND 2005-2009

JAN - FEB (US$ 000)% SHARE

2010

% CHANGE 2010/2009

II

I

NO. DESCRIPTIONVALUE IN US$ 000

% SHARE2009

20

21

22

23

24

CHANGE CHANGE

(%) (%)

08/07 09/08

10 MAIN COMMODITY 783,160,133 770,356,096 702,388,229 739,996,220 754,405,065 601,118,388 63,748,924 54,946,338 68,181,197 2.96 -49.16

1 TEXTILE 65,835,237 60,996,174 61,831,942 65,854,559 76,793,480 68,896,404 7,959,706 5,869,853 6,287,784 16.61 -10.28GARMENT 8,187,155 13,421,779 15,983,877 17,436,132 21,624,249 20,075,378 2,243,657 1,895,823 2,816,738 24.02 -7.16FIBER & YARN 57,648,082 47,574,395 45,848,065 48,418,427 55,169,231 48,821,026 5,716,049 3,974,030 3,471,046 13.94 -11.51

2 ELECTRONIC DEVICES 202,177,167 201,982,024 191,338,905 190,814,910 173,799,831 135,544,901 13,686,162 12,285,040 14,847,242 -8.92 -22.013 RUBBER 36,733,839 45,224,431 60,154,061 64,317,329 76,111,255 53,197,162 6,073,795 7,048,765 8,225,173 18.34 -30.114 CPO 41,910 0 0 0 91,473 0 0 0 0 --- ---5 FORESTRY PRODUCT 430,272,360 397,958,914 335,676,270 342,475,644 351,147,542 267,311,398 27,158,048 22,516,859 30,121,098 2.53 -23.87

FURNITURE 15,352,907 17,207,512 16,034,027 21,680,751 26,312,309 34,736,715 3,191,133 1,705,757 2,209,245 21.36 32.02WOOD & WOOD PRODUCT 229,385,905 199,028,436 170,831,375 164,079,394 153,385,602 124,990,500 13,387,411 11,960,127 12,728,422 -6.52 -18.51PULP AND PAPER 185,533,548 181,722,966 148,810,868 156,715,499 171,449,631 107,584,183 10,579,504 8,850,975 15,183,431 9.40 -37.25

6 FOOTWEAR 9,955,095 11,303,206 10,815,620 13,086,370 18,020,181 17,208,083 2,213,742 1,080,477 2,120,185 37.70 -4.517 AUTOMOTIVE 24,640,999 37,485,283 24,050,271 42,140,556 39,224,663 37,206,428 4,009,705 3,974,030 4,761,603 -6.92 -5.158 SHRIMP 6,246,173 6,309,153 10,437,879 8,849,396 10,936,773 8,565,869 1,002,579 1,129,834 924,144 23.59 -21.689 COCOA 2,024,474 739,198 359,309 187,701 332,239 307,354 27,513 9,093 34,863 77.00 -7.4910 COFFEE 5,232,879 8,357,713 7,723,972 12,269,755 7,947,628 12,880,789 1,617,674 1,032,387 859,105 -35.23 62.07

10 POTENTIAL COMMODITY 32,200,955 37,969,990 42,337,598 49,026,803 139,625,742 44,674,286 3,973,742 3,325,318 3,750,382 184.79 -68.00

1 HIDE & SKIN 2,538,383 3,084,884 4,301,997 4,211,768 2,020,784 2,979,922 90,381 251,072 377,787 -52.02 47.462 MEDICAL APPLIANCES 228,914 353,094 158,086 519,700 618,332 1,091,892 41,974 405 34,863 18.98 76.593 HERBAL VEGETATION N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A4 PROCESSED FOOD N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A5 ESSENTIAL OIL 290,278 48,017 77,264 254,329 222,034 128,329 5,559 77,257 32,207 -12.70 -42.206 FISH & FISHERIES PRODUCT 17,985,679 21,123,143 21,097,854 22,216,671 31,713,304 34,884,689 3,273,750 2,681,673 2,761,824 42.75 10.007 HANDICRAFT 8,840 71,782 136,811 28,297 897,926 85,015 7,588 124 218 3,073.22 -90.538 JEWELRY 301,684 572,820 732,166 1,561,235 1,993,772 551,105 71,704 1,494 47,518 27.70 -72.369 SPICES 1,208,950 1,522,497 1,426,282 1,645,361 1,120,582 2,241,197 167,175 85,737 46,828 -31.89 100.0010 STATIONERY 9,638,227 11,193,753 14,407,138 18,589,442 101,039,008 2,712,137 315,611 227,556 449,137 443.53 -97.32

TOTAL NON PETROLIUM & GAS 815,361,088 808,326,086 744,725,827 789,023,023 894,030,807 645,792,674 67,722,666 58,271,656 13.31 -27.77

2007 2008NO DESCRIPTION

2004 20052010Mar

VALUE (US$)

2009 2010Jan

2010 Feb

2006

25

Maintaining Indonesia’s Economic Reform Agenda

26

2727

28

Improved Competitiveness

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Improving Efficiency in Import ProceduresImprove efficiency in import proceduresCreate better tracking system of products with

potential health and safety hazardsKey points:Establish new registration system as part of

National Single Window program, which will ultimately be part of ASEAN Single Window program – Registration requires 7 working days with completed requirements

Technical verification and investigation to be conducted as part of creating tracking system

Registered importers who have undertaken verification can go to the green lane

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Opportunities for Trade and InvestmentIndonesia and Taiwan can serve

as production base:

Indonesia is member of AFTA and other FTAs: ASEAN-China and ASEAN-Korea, ASEAN-Japan, ASEAN- India, ASEAN-ANZ;

Come and join the 25th Indonesia Trade Expo (largest trade expo in Indonesia)

13 – 17 October 2010, Jakarta International Expo http://www.nafed.go.id/ (National Agency for Export Development)

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Several Competitive Advantages for Investors:

• Large domestic market

Indonesia is a large and growing market (retail sales are growing fast) and part of Asian market

Major expansions expected in infrastructure and resource based sectors, as well as increasing the competitiveness and value added of manufacturing industries

• Market-based macroeconomic policy • Potential outsourcing partners• Abundance of diversified natural resources• Strategic location

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SummaryGovernment is committed to progressive reforms Policies to support trade and investment Maintaining macroeconomic stability Strong and sustainable economic growth Enhance economic coordination and development cooperation with other main global economies

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THANK YOU

www.depdag.go.id

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