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.