Y-ROUND -- 52pt

Y-ROUND -- 52pt Economy in Year of the Rooster heading for bleak finale

Economy of Year of the Rooster heading for bleak finale

Primastuti Handayani The Jakarta Post/Jakarta

For "Donny", a 32-year-old employee of a private company in Central Jakarta, the Year of the Rooster has brought no good.

"This year sucks," he said. "Although my office raised our salaries recently, it was not a significant raise considering the inflation rate."

With a monthly salary of about Rp 6 million (US$615), Donny has to set aside a third of it to pay his housing loan installments.

"The rising interest rate has pushed my payments up to Rp 2.3 million from Rp 2 million previously. While other expenses also surged, particularly food prices," he said. He bought a house in a housing estate in Karawaci, about 25 kilometers west of Jakarta, but still lives in a rented low-cost apartment in Pejompongan, Central Jakarta.

"Living in the capital's downtown area helps me save more," he said. "Imagine if I already lived in my own house, how much would I spend on transportation then."

Donny's story is typical of many other's with bank loans. Yet, millions of other Indonesians have to endure a much tougher time.

Indeed, if a worker like Donny -- who actually earns more than six times Indonesia's income per capita of about US$1,000, which means less than Rp 1 million a month -- is feeling the pinch of higher living costs, imagine the hardships suffered by millions of his fellow Indonesians, most of whom do not even have access to bank loans.

Interest rates for customer loans have gone up, following the central bank's policy to raise its BI key rate to 12.75 percent on Dec. 6, the sixth since Bank Indonesia introduced its inflation-targeting BI Rate at an initial level of 8.5 percent in June.

The higher BI key rate has increased lending interest rates at banks and some people have decided to resell their houses or vehicles, or for businesspeople, to reduce their production capacity, which could mean a lower revenue margin and, in many cases, layoffs.

The skyrocketing year-on-year inflation rate -- which the Central Statistics Agency (BPS) reported as standing at 18.38 percent in November -- was the main reason for the BI to raise the key rate.

With consumption comprising more than 60 percent of the gross domestic product (GDP), the rate increases and high inflation -- which cuts people's purchasing power -- have eventually contributed to a slowdown in economic growth, from 6.2 percent in this year's first quarter to 5.3 percent in the third.

P. 14

Y-TAX -- 48pt 7/1 (1x40)

Reform of tax regime going nowhere fast

Reform in tax regime not going anywhere Rendi A. Witular The Jakarta Post/Jakarta

Rising public expectation over a substantial reform in the country's tax regime seems to be fading away now as vested interests within the Ministry of Finance's Directorate General of Taxation have stalled the deliberation of the tax law amendments.

With the delayed reform, uncertainty over tax law enforcement and corruption within the tax office have spawned uncontrollably, scaring away foreign investors at a time when the country is in dire need of investment in order to create more jobs.

The good intention shown by President Susilo Bambang Yudhoyono to accommodate the needs of the business community during the drafting of the amendments, by involving the Indonesian Chamber of Commerce and Industry (Kadin), has not received a warm welcome from tax officials.

"There is actually progress in tax reform, in the sense that there is already good will from the Susilo administration. But implementation has not been easy following opposition from the bureaucracy level," said senior auditor John A. Prasetio, who is also Kadin vice chairman for international economic cooperation.

Bureaucrats who remain in power, despite a change in the country's leadership, maintain the status quo for their own interests or those of the group.

There was hope early this year for an overhaul in the tax system when representatives from Kadin and the Ministry of Finance's Directorate General of Taxation agreed to jointly draft tax law amendments.

The revisions included Law No. 16/2000 on general taxation arrangements and procedures, Law No. 17/2000 on income tax and Law No. 18/2000 on value-added tax (VAT) on goods and services and luxury sales tax.

As the draft revisions were seen to accommodate the interests of both the business community and the tax directorate, the amendments were then signed by President Susilo and submitted to the House of Representatives for deliberation.

However, the amendments, which were initially hailed as business-friendly, were later found to contain unfavorable articles, which granted more authority to tax officials, who are prone to power abuse.

There was outrage among business communities after they found out that the amendments contained changes altered unilaterally by the tax officials when they were about to be submitted to the President.

Even though the House has yet to start deliberations on the draft legislation, the general public -- including foreign businesspeople -- has expressed grave concerns over several new provisions.

Y-INVEST -- 48pt Investment climate still walking the tightrope

Investment climate still walking a tightrope

Urip Hudiono The Jakarta Post/Jakarta

"Philip Morris buys Sampoerna for US$5.2 billion."

If there was one sentence that could summarize Indonesia's investment sector in 2005, that could well be it. The U.S. tobacco giant's purchase in March of a 97 percent stake in Indonesia's third largest cigarette producer was clearly the event of the year for investors and the business community.

The new administration of President Susilo Bambang Yudhoyono, who came to office promising to improve the country's investment climate, touted the deal as proof that investors had regained their confidence in Indonesia.

Investment is indeed once again becoming a main driver of Indonesia's economic engine, along with consumer spending and exports, after having collapsed in the aftermath of the 1997-1998 monetary crisis.

According to the Investment Coordinating Board (BKPM), actual foreign direct investment (FDI) from January to October more than doubled to US$8.6 billion on 785 projects, from $3.2 billion on 421 projects over the same period last year. Realized domestic investment also showed an upward trend, rising 36 percent to Rp 16.6 trillion (some $1.66 billion) on 178 projects, from Rp 12.2 trillion on 88 projects.

These investments provided jobs for 226,096 people as of October, compared to 206,258 in 2004.

Along with direct investments in the mining and financial sectors, which are outside the control of the BKPM, Indonesia's investment sector grew by 12 percent as of the third quarter of 2005, accounting for 21 percent of gross domestic product. Last year, direct investments grew by 18 percent, accounting for a similar share of the GDP.

Meanwhile, portfolio investments in Indonesia's stock and bond markets also saw vigorous growth in 2005. The highlight here was the government's two global bond offerings -- $1 billion in April and another $1.5 billion in October, with both offerings oversubscribed.

And despite a few ups and downs due to the economic shock of soaring global oil prices, inflation and interest rates, investors maintained their interest in Indonesian stocks, with the country's composite index managing to stay above the 1,000- point threshold for the entire year.

Indonesia's improving economy over the past few years, along with peaceful elections in 2004, can be credited with creating the political and economic stability needed for the business and investment sectors to thrive.

P. 15

Y-MARKET -- 48pt Stocks shine as mutual funds collapse

Equity investment shines as bonds, mutual funds collapse

Rendi A. Witular The Jakarta Post/Jakarta

The Jakarta stock market is in for another shining year this year, hitting record highs along the way, driven in part by the influx of investors from the bond and mutual fund markets as a result of their declining yield due to various economic factors at home and overseas.

With a high interest rate environment in the global market and at home amid worrisome inflationary pressures, investment instruments which boast yields from interest-rate spreads are no longer eagerly hunted by investors.

Trading in the equity market started to flourish early in the year, on confidence over the new administration under President Susilo Bambang Yudhoyono, which took over in October, 2004.

The market started to get a boost from the external front when in the first quarter of this year, investors began to looking at equity investment or dollar-denominated assets following a steady increase in the interest rate in the United States.

Bank Indonesia later tracked down the trend and gradually raised its key interest rates, undermining demands for fixed- income investments, such as bonds and mutual funds, with most of the investors eventually turning to the equity or money market which offer higher yields.

The jitters were also exacerbated by the unstable monetary condition resulting from higher global oil prices which put the country's fiscal balance under serious threat.

The impact was apparent on the mutual fund market in March when investors started to suffer from a decline in their investable funds, especially in fixed-income investment instruments, which is the underlying instrument in the industry.

Fixed income instruments account for the lion's share of the country's mutual fund industry composition.

Institutional investors, who are fully familiar with the risks, began withdrawing their investments and shifting them to either the more lucrative equity or money markets.

This was not the case for most retail investors, however, who later blamed their fund managers for not adequately informing them of the dangers lurking ahead. Most of them had to contend with the fact that -- in contrast to what their fund managers had told them to the effect that mutual funds were more or less like bank deposits: risk-free investments with fairly good returns -- their investments were in fact declining rapidly in value.

In just six months, the level of investable funds in the industry has plunged by some 45 percent, while net asset value (NAV) has nose-dived by 60 percent.

Y-ENERGY -- 48pt 2005: Another year of ad hoc measures

2005: Another year of reactive measures to cut energy consumption

Leony Aurora The Jakarta Post/Jakarta

From elementary school on, students have the postulate drummed into them that Indonesia is rich in natural resources, including abundant oil and gas, to be used for the greater good of all.

While this assumption, presumably encouraged to build one's pride in being an Indonesian, is true in theory, the challenges in extracting and making use of these resources efficiently are often not addressed.

Therefore, it came as a big surprise when fuel scarcity began to creep up on the nation in March and swept across the archipelago in June. Gas stations posted "no gasoline" signs and motorists became accustomed to queuing.

Domestic stockpiles for premium gasoline and diesel fuel dropped to 12.7 days and 14.5 days respectively, far lower than the ideal buffer of at least 22 days of supply.

State oil and gas firm PT Pertamina blamed the shortage on cash-flow snags, which it had experienced from March onward due to late fuel subsidy delivery by the government amid the soaring global oil prices.

Pertamina also admitted that it had reduced daily offtake as fuel consumption had increased and exceeded the pro rata quota -- calculated from the 2005 total allocation of subsidized fuel of 59.6 million kiloliters (kl) approved by the House of Representatives -- by 10 percent, in spite of fuel price increases of 29 percent on average in March.

For the man on the street, it became a baffling question: "Shouldn't high oil prices be a good thing for us? Don't we produce oil in abundance?"

Many did not realize that Indonesia has effectively become a net oil importer. Production of the aging oil fields has declined by 5 percent per year, standing at 1.075 million barrels per day (bpd) on average in 2005, while fuel consumption rose by 6 percent. To secure domestic demand, Indonesia, through Pertamina, has to import 400,000 bpd and 300,000 bpd of refined products.

Global oil prices have continually climbed since the beginning of the year, hovering at around $60 per barrel from June onward in New York with a record-high of $70.85 per barrel on Aug. 30 after Hurricane Katrina hit the United States.

The government was forced mid-year to revise the 2005 budget and drastically raise the fuel subsidy to Rp 76.5 trillion (US$7.8 billion), assuming oil prices of $45 per barrel, from Rp 19 trillion and $24 per barrel, respectively, in the previous draft.

The fuel crisis subsided after the ever-populist President Susilo Bambang Yudhoyono ordered Pertamina to pour fuel first and worry about the subsidy later.

P. 16

Y-IT -- 48pt Best IT brains take flight for more money

Best men in IT take off for more promising countries

Anissa S. Febrina The Jakarta Post/Jakarta

A conversation took place in a modest house, one with unplastered walls and the exposed roof covered in cobwebs -- in a traditional fisherfolk's village in Labuan, Banten, some five hours drive from Jakarta.

The house belongs to a neighborhood unit (RT) chief and he was talking with his son, who had returned from working in Malaysia.

"I am an IT (information technology) engineer and worked on some projects with companies in Malaysia," said the 27-year-old son, Tubagus Ari, who helped Banten provincial administration develop its www.banten.go.id website.

"Working abroad is more challenging, particularly in Malaysia, which is very accommodative in terms of technology," Ari said. "To be honest, this country lags way behind in technological advancement."

Believe it or not, Ari explained, some of the best IT engineers working in Malaysia and Singapore are Indonesians. Yet, the country's information and communications infrastructure lags behind that of neighboring countries.

Put simply, Indonesia is all brain without a functioning body. And the brains have chosen to move to countries where the work is better.

The local information and communications technology (ICT) industry has long been without guidelines, responding late to changes in the global forum.

Bureaucracy-wise, despite fears of reemerging information censorship, the transformation of the office of the state minister of communications and information into a portfolio Ministry of Communications and Information in late January may be promising.

Among the ministry's technical posts are the wireless technology and information infrastructure directorate general, which will soon design an ICT road map with the Ministry of Transportation's post and telecommunication directorate general.

The communications ministry hopes to more appropriately allocate existing infrastructure such as frequencies.

The Ministry of Industry will support the promised development through its new transportation and ICT industry directorate general.

They should also put high on their agenda the proper utilization of ICT for the democratization of information instead of only the generation of income.

And more importantly, the government needs to speed up the development of ICT infrastructure.

Y-TEXTIL -- 48pt Textile sector faces multifarious problems

Textile sector faces overlapping problems

Anissa S. Febrina The Jakarta Post/Jakarta

The already-ailing Indonesian textile sector had the ladder kicked away from it this year.

Early in 2005 it was charged with being ill-prepared to face the termination of the Multi Fabric Agreement (MFA), which 20 percent of textile manufacturers here were previously reliant upon.

The termination agreement was in fact reached a decade ago.

Without the global textile quota system, the market will indeed be freer, that is for those with high competitiveness, which currently reads, China.

With considerably rich natural materials, higher productivity and more integrated infrastructure, in the first five months of 2005, China's exports to the European Union (EU) increased by almost 50 percent while Indonesia's dropped by 12.7 percent.

Exports to the EU are among the most important for Indonesia as countries under the group absorbed some 40 percent of global textile imports, followed by the United States with 30 percent.

To give some relief, based on the Central Statistics Agency's data, Indonesia's 2005 average monthly exports to the U.S. increased to US$160 million from $130 million in 2004.

However, later in the year, those figures were strongly questioned.

And while China's strategy is clearly working, Indonesian textile and garment companies are facing more complicated challenges in increasing their competitiveness.

Let us start with surging imports from China to, not only the U.S. and EU markets, but also to the Indonesian domestic market.

Shopping in Tanah Abang, Central Jakarta -- known as Southeast Asia's largest textile market, with daily transactions amounting to Rp 150 billion (US$15.33 million) -- one cannot help but be taken aback by the predominance of made-in-China textiles and garments, rather than those produced here.

In the first quarter of the year, garment imports from China increased tenfold to $4.27 million from the same period last year, the Indonesian Textile Association (API) said.

Along with the increase in imports, exports to the U.S. in the first five months of the year also increased by 10 percent, raising suspicions of transshipment.

The API argued that such an increase was unlikely as 77 textile manufacturers had stopped operating the month before.

The Ministry of Trade then required a stricter procedure in the issuance of Country of Origin (COO) documents for exported textiles. However, illegal practices have not significantly decreased.

To make things worse for the sector, illegal imports flooding the domestic market have also been a chronic problem, both in terms of new and secondhand goods.

At Senen Market, also in Central Jakarta, three levels of kiosks sell imported secondhand garments with shirts priced at Rp 5,000 and quality suits for an unbelievable Rp 20,000.

So, that takes the biscuit for the mass lower domestic market.

Meanwhile, in the upper market, foreign brands from the U.S. or EU dominate with, once again, outsourced products from China or Vietnam.

Aside from the external problems, textile manufacturers must deal this year with increases in both power rates for industrial use and fuel prices.

State power firm PLN raised later in the year the industrial coefficient rate, and on top of that applied a kind of penalty for those using power more than the allowed quota during peak time.

API chairman Benny Soetrisno said the sector was among those operating 24 hours a day to maintain productivity and the policy to increase fuel prices would increase operating costs by at least 25 percent.

Energy costs contributed to almost 30 percent of total operating expenses.

The Oct. 1 fuel price increases -- which saw the prices of premium gasoline and diesel fuel nearly double and that of kerosene triple -- in the end also leads to higher transportation and labor costs. The two factors contributed quite significantly to the increase in expenses as the sector is labor-intensive.

In terms of company infrastructure, the productivity of manufacturers lags behind those in China since they still utilize old machinery.

The industry ministry estimated that the sector would require a $5 billion investment to revamp its production facilities.

Separately, industry players calculated that they would require at least $100 million for a first-phase rejuvenation of their machines.

This would require the support of the banking sector, which unfortunately remains reluctant to grant loans to textile companies. Not to mention the currently high interest rates.

As a result of these overlapping problems, the sector only grew by 1.1 percent in the first nine months of 2005, as compared to 4.2 percent in the corresponding period of 2004.

The industry is likely to fail to meet the targeted growth of 4.2 percent by the year end, despite the increase in total exports.

However, there is a silver lining.

According to the Investment Coordinating Board (BKPM), foreign investment in the textile industry had reached Rp 1.57 trillion as of September, with the commitment of two more foreign investors.

In November, considering the on-paper data of exports and investment, then minister of industry Andung A. Nitimihardja, before being replaced by Fahmi Idris on Dec. 7, set the 2006 exports target at $8.3 billion.

His projected exports target for 2009 was even more optimistic at $11.8 million.