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Indonesia - Good news on the investment front while trade takes a hit with China

Updated On: Aug 10, 2007

The last week saw some positive news for Indonesia on the investment front. 

Nike which has initially considering ending its contracts with factories in Indonesia has recanted on the decision and extended the contracts instead, bringing more certainty to the fate of 14,000 shoe workers. 

Following this pleasant piece of news for the Nike workers, M Lufti, the Chief of Capital Investment Coordinating Board (BKPM), was quoted by Antara saying that investors’ interest in Indonesia’s shoe industry remains high, although some companies have closed their businesses. He said there were at lest nine new companies had invested in Indonesia in 2006-2007, including companies from KoreaBritainand Taiwan. As labor-intensive industry, shoe manufacturing benefits a lot from Indonesia’s cheap labor.

Other good news came from mining and oil and gas industries. Canadian nickel mining company, Inco Ltd.'s Indonesia unit plans to build two new nickel plants on Sulawesi island at a cost of US$2.5 billion.

From the oil and gas sector, state-owned company Pertamina will likely sign a joint venture agreement with Malaysia’s Petronas and Vietnam’s  PetroVietnam later this month to jointly explore and develop hydrocarbon resources in Randu Gunting Block, East Java. The block is estimated to contain 600 million barrels of oil and 1.7 trillion cubic feet of gas, as reported by Jakarta Post. The Indonesian government has also expressed its interest to offer more blocks for oil and gas exploration projects, bringing the total number of blocks to be tendered to 25. It also wants a better split to benefit the state. However, the parliament’s budget committee has asked the government to renegotiate oil and gas contracts following the markup scandal revealed by the State Audit Board (BPK). It has been recognized that the government revenues from oil and gas work contracts were low. Meanwhile, Indonesia has signed a deal with Iran to build a US$5.6 bln oil refinery in Banten. The construction is planned to start next year and scheduled to be completed in 2012.

Indonesia was also pleased to receive some investment promises from several countries and development bank. Islamic Development Bank (IDB) expressed its interest to build Jakarta's mass rapid transportation monorail and expand the capacity of the sewerage system. Japan and Indonesia will sign a long awaited Economic Partnership Agreement (EPA) during the visit of Japanese PM Shinzo Abe toJakarta later this month. The agreement will consist of two deals on the construction of two power plants and three deals concerned partnerships in the oil and gas sector.

SwitzerlandIndonesia's fifth largest foreign investor last year through its ambassador in Indonesia has also expressed its intention to invest more in Indonesia. Last year, it recorded a total of US$ 477.7 million in foreign direct investment. Malaysia was the biggest investor with US$ 2.12 billion in FDI in 2006.

Straits Times also reported the signing of a MOU between 22 companies - eight of which are from Singapore- and the Riau government to invest US$ 1.9 billion worth of new investments and exports trade contracts. All of them - ranging from the oil and gas to tourism industries - will be located in Batam, Bintan and Karimun islands. The investment projects will create at least 50,000 jobs. Legal certainty is still the major concern for investors. 

The tourism industry which was dealt a blow earlier with the EU ban on all Indonesian airlines may get a respite after the EU External Relations Commissioner promised that EU would review its decision on the ban.  Commissioner Ms Benita Ferrero-Waldner told her Indonesian counterpart, Hassan Wirayuda that the EU intends to lift as soon as possible its ban on Indonesian airlines flying to Europe. This will probably be solved in October this year. Saudi Arabia who had also reportedly expressed its concern over Indonesia’s airlines safety and was mauling the same ban imposed by the EU fortunately decided to wait for the safety audit on Garuda Indonesia before imposing the ban. Garuda Indonesia announced it has passed the audit conducted by General Authority of Civil Aviation (GACA) on the safety flight procedures and maintenance. With this, Saudi Arabia has dropped its plan to ban the Indonesian flag carrier. Garuda also has another good piece of news, revealing that it has returned to profit in the first semester of this year, after it raised its fares and held an efficiency program.

Amidst all the good news, there is a slight hitch in trade relations with China banning all aquatic imports from Indonesia. This is believed to be retaliation in response to last month's measures by Indonesia to ban Chinese-imported candies contaminated with formaldehyde. Just early this week Indonesia announced a new list of banned imports from China. Trade Minister Mari Elka Pangestu said her ministry is doing merely routine scrutiny, conducted by all related departments with the main objective of securing food safety and controlling the distribution of illegally imported products. The new ban list included 26 cosmetics products imported from ChinaTaiwanSouth KoreaThailand and the Philippines, which were found to contain hazardous substances.

China announced its temporary ban on Indonesian seafood Friday after claiming checks on Indonesian products had turned up toxins, dangerous chemicals and pathogens. The total value of seafood exports to China in 2006 was around US$70.3 million. Although the value is not so big, the products are very important because they are the main source of Indonesian fishermen's income. In the same year, the total value of food and drink imported from the world's fastest growing economy was around $135 million.

The ban on Indonesian seafood came as a surprise considering it had implemented European Union health standards.  Business circles in Indonesia are understandably concerned that Indonesia and Chinawould not ruin each other through their trade polemics and unnecessary tit-for-tat measures. (8 August 2007)

Sources:

Government extends ban on Chinese imports (Jakarta Post, 7 August 2007)

Businesses hope RI, China not to ruin each other (Antara, 8 August 2007)

Govt wants to combine business incentives into single regulation (Jakarta Post, 4 August 2007)

Indonesia bans more Chinese imports (Jakarta Post, 6 August 2007)

RI's shoe industry still attracting investors: BKPM chief (Antara, 6 August 2007)

JapanIndonesia to sign economic (Jakarta Post, 4 August 2007)

Indonesian unit of Inco to build two new plants for US$2.5 billion (Jakarta Post,

China food ban came as a surprise, says govt (Jakarta Post,

Nike agrees to extend contract with factories (Jakarta Post, 1 August 2007)

China bans aquatic imports from Indonesia (Antara, 4 August 2007)

Jakarta may get Islamic funds for projects (Antara, 4 August 2007)

Pertamina, Petronas to sign agreement (Jakarta Post, 6 August 2007)

IranIndonesia to build US$5.6 bln oil refinery in Banten (Antara, 24 July 2007)

House urges govt to renegotiate oil, gas contracts (Antara, 7 August 2007)

Garuda turns to profit after years in the red (Jakarta Post, 3 August 2007)

Garuda comes clean in Saudi audit (Jakarta Post, 3 August 2007)

RI minister says EU eager to lift airlines ban (Jakarta Post, 2 August 2007)

Switzerland to invest more in RI: Envoy (Jakarta Post, 1 August 2007)

Firms pledge to invest $3b in Riau Islands SEZ (Straits Times, 3 August 2007)