Economy and Trade

General Feature

The Indonesian economy in 2005 initially gained momentum conducive to quite moderate growth, which had been coupled with improved business confidence and rapid demand for investment. It seemed that severe economic crisis which had nearly crippled the economy for the last six years has abated as it had been marked by succesful transition from the program under the Insternational Monetary Fund's Extended Fund Facility. Moreover, poverty rate had positively lowered to the level prevailing during the pre-crisis.

Attributable to the quite moderate economic growth had been the secured stability of macro-economic situation for the last few years as relatively lower inflation, stable exchange rate and gradual decrease of interest rate did reflect it.

Economic momentum along with political and high expectation over economic policy under the administration of President Susilo Bambang Yudhoyono had indeed promoted sentiment of the people. Macroeconomic risks, which are measured by foreign debt ratios against GDP, continued to showing some improvements. However, it seemed that investment climate necessisated improvements, particularly in several sectors such as oil and gas mining that in turn had experienced a decline in their production.

The better performance of economic indicators in 2003 should certainly become the stable basis for more improvement of economy on 2004, of which its recovery assumptions of the real and macro-economic sectors to be attained have been defined through the 2004 State Budget. Those assumptions are among other things: economy is projected to grow at 4.8 percent; investment at 2.8 percent; agricultural sector at 2.3 percent; and manufacturing sector at 3.5 percent.

Rupiah exchange rate was stable with strengthening trend. Export value reached US$61.02 billion or US$5 billion in average per month, meaning it was returning to the level reached before the monetary crisis in 1997. Non-oil and gas export value showed an increase of 5.18 percent compared to that of 2002. More hearteningly, an international ratings agency, Moody's, has upgraded the country's sovereign rating from CCC-to B+, boosting foreign trust to invest in Indonesia.

In line with the improved macro-economy, the year 2003 also saw the dissolution of the National Bank Restructuring Agency (BPPN) and the termination of the IMF's Extended Fund Facility. The Government then issued an economic policy package called the "White Paper" (Presidential Instruction No. 5 of 2003) on September 2003 with its principal targets: to build on the macro-economic progress; to further strengthen the financial sector; and to improve the climate of investment, exports and job opportunities. Meanwhile, inflation rate is projected to stand at 6.5 percent; Rupiah exchange rate against one U.S. dollar at Rp 8.500; Bank Indonesia's three month-notes (SBI) at 8.5 percent in average; oil price per barrel at US$22; and crude oil production per day at 1.15 million barrels. In addition, the government debts to gross domestic product (GDP) ratio is expected to be 60.3 percent, much better than that of 2003 which was 66.4 percent. The country's foreign exchange reserve is projected to reach US$34.4 billion, lower than that of 2003, which stood at US$36 billion. The decrease is chiefly due to the payment of principal and interest of foreign debt.

ECONOMIC PROSPECTS

The 2004 General Elections i.e. general elections to elect members of legislative bodies and the direct Presidential Election, would truly encourage the increase of expense and demand for goods and services in bulk. Further, the post 2004 general elections is expected to give contributing achievements as follows: improvement of economic growth; enhancement of quality of economic growth as the result of political and public accountability improvement; better economic stability as the national result of better representation system in national, provincial and district/municipal legislative bodies.

In the context of achieving the matters mentioned above, the Government has determined economic priority programs for the year 2004, namely: to maintain continuous economic recovery and reform in the first year after the termination of the IMF's Extended Fund Facility to nurture external and internal credibility; to execute strategy of growth based on competitive edge improvement through investment and exports; to boost more growth of the 2004 Gross Domestic Product for the sake of the people's welfare improvement in the whole; to continue the strive for poverty eradication and creation of job opportunities through human resource quality improvement towards Millennium Development Goals, and better economic development which takes social-welfare into account; to secure the implementation of the 2004 general elections from the economic point of view, by maintaining economic activities in order that market of goods and services, capital market and labor market run normally, and to maintain sufficient supply and distribution of basic materials throughout the country; to anticipate the possibility of accelerating the 2005 State Budget drafting in connection with the implementation of the 2004 general elections; and to encourage the application of good corporate governance.

ECONOMIC GROWTH (GDP)

Despite SARS endemic and terrorist attacks, the Bali bombings and the Marriott Hotel bombing, impeding the country, the economy in 2003 proved tough enough to grow moderately at 4.1 percent, higher than that of 2002 by 3.7 percent and even higher than global economic growth, which was estimated at 3.2 percent. Economic growth without oil-and-gas was recorded at 4.6 percent. The value of GDP at 2000 constant prices in 2003 was estimated to reach Rp444.5 trillion, and without oil-and-gas was Rp412.7 trillion. Viewed from economic industrial sectors' contribution to GDP in 2003, some 24.65 percent originated from manufacture, 16.58 percent from agriculture, 16.32 percent from trade, 10.70 percent from mining, 10.39 percent from services, 6.88 percent from finance, 6.25 percent from transport and communications, 6.00 percent from construction, and 2.22 percent from utility.

Economic growth for the first quarter of 2004 was estimated to hover between 4.3 percent and 4.7 percent. The estimated growth was expected to be underpinned by higher fair growth of exports and consumption. Consumption was expected to grow by between 4.2 percent and 5 percent, and export between 2.5 percent and 3.5 percent.

By sactorial fronts, the biggest contribution to GDP in 2004 is still expected coming from the sectors of manufacture and agriculture. Manufacture, which is predicted to grow at only 3.5 percent, is expected to contribute almost a quarter of GDP. Agriculture is expected to contribute some 16 percent, though predicted to grow by 2.5 percent.

Except mining, other sectors such as electricity, gas and drinking water, construction, trade, hotel and restaurant as well as transport are expected to post an increasing contribution.

The country's GDP at current prices in March 2003 was recorded at Rp 451,530.29 billion, and in March 2004 at Rp 551,164.6 billion, meaning an increase of 24.6 percent. Non-oil and gas GDP in March 2004 grew at about 24.49 percent, to reach Rp 506,265.8 billion compared to that of March 2003. While oil and gas GDP in March 2004 decreased by 12.36 percent compared to that of March 2003, namely from Rp 51,777.4 billion in March 2003 going down to Rp 45,376.8 billion in March 2004.

INCOME PER CAPITA

Parallel with the improved economic situation as macro-economic indicators showed, the GDP per capita for Indonesians notes an increasing tendency, though has not yet reached the level before the monetary crisis in 1997.

In 2003 per capita income at current prices grew to 7.1 million rupiahs or about US$968, from 6.6 million rupiahs in 2002. Based on 2000 constant prices, per capita income in 2003 noted an increase of 2.85 percent and 1.58 percent in 2002.

Jakarta International Container Terminal that plays an important role in importing-exporting activities

EXPORTS

Exports continue to show a heartening development, particularly those of non-oil and gas. Export value in 2003 reached US$61.023 billion or an increase by 6.76 percent compared to that of 2002. The value of non-oil and gas exports in 2003 grew by 5.18 percent surpassing the targeted 5 percent to reach US$47.380 billion. That of oil and gas increased by 12.63 percent to reach US$13.642 billion.

Dominating exports of non-oil and gas in 2003 were machinery and electric tools. They accounted for 13.08 percent. Trailing behind was mechanical engines that accounted for 6.18 percent, animal and vegetable oil for 6.05 percent.

Main export destinations of the country's exported commodities in 2003 were the US that accounted for some 15 percent, Japan for 14 percent, and Singapore for 9.93 percent.

When entering the year 2004, exports continued to indicate an increasing trend: In January 2004, export value reached US$5.03 billion, compared to that of January 2003, which stood at US$4.99 billion. In April 2004, export value was recorded at US$5.21 billion, increasing by 2.68 percent compared to that of March 2004, which reached US$5.07 billion.

The increase of exports in April 2004 was attributed to the growth of non-oil and gas exports by 3.94 percent from those of March 2004. Export value in May 2004 even reached US$5.5 billion or an increase of 5.6 percent. Attributable to the increase was the high augment of non-oil and gas exports to China, Japan and South Korea. Thus, cumulative exports during the period of January-May 2004 reached US$25.71 billion, meaning an increase of 2.21 percent compared to that of the corresponding period in 2003.

In May 2004 the country's foreign trade surplus was recorded at US$2.28 billion, compared to US$1.75 billion in April 2004.

IMPORTS

The country's import value in whole in 2003 was US$32.39 billion, or increasing by some 3.52 percent. In January 2004, import value grew a bit by 0.24 percent, making the total amount of imports during the said month US$2.76 billion. In March 2004, non-oil and gas imports reached US$2.18 billion before augmenting by 5 percent to reach US$2.29 billion in April 2004. During the period of January-April 2004, import value rose by 10.20 percent compared to that of the corresponding period last year, namely from US$10.99 billion to US$12.12 billion. The increase was attributed to imports of oil and gas as much as 35.16 percent, and 3.05 percent of non-oil and gas imports.

Imported commodities comprised machines, organic chemical, electric machines and equipments. Indonesia imported those commodities mainly from Japan, the US and China.

In May 2004, import value amounted to US$3.22 billion, decreasing by 6.81 percent compared to that of April 2004. Cumulatively the country's import value reached US$16.88 billion or an increase by some 24.38 percent compared to that of the corresponding period in 2003, which amounted to US$13.57 billion.

BALANCE OF PAYMENT

Balance of payment in the past few years marked positive development. Underpinned by increasing tendency of exports, the country's balance of payment in 2003 recorded a surplus of US$4.2 billion, up from US$4.0 billion in 2002.

In the meantime, the country's international foreign exchange reserves at the end of 2003 stood at US$36.3 billion, swelling from US$32.0 billion in 2002. In the second week of August 2004, international reserves were recorded at US$34.97 billion.

MONETARY

Monetary policies remain to be focused on striving to maintain monetary stability. This is aimed at securing the target of the middle-run inflation by keeping on reinforcing the process of economic recovery through the promotion of economic growth. In line with this, interest rate is still made possible to be lowered prudently and consistently by the achievement of such inflation target. On another side, necessary interventions in foreign exchange would be done to control excessive volatility of rupiah exchange rate. This would be parallel with the implementation of foreign exchange transactions monitoring and control against prime doers in markets.

In general, monetary condition during the first quarter of the year 2004 was quite stable, portraying this was expanded stable and controlled monetary, underpinned by more favorable domestic economic fundamental factors and controllable inflation expectation.

INFLATION

The year-on-year inflation rate in the year 2003 was recorded at 5.1 percent, far lower than that of 2002 at 10.48 percent.

For the year 2004, inflation rate is expected to be 6.5 percent, and for the year 2005 and 2006 is projected to be 5.5 percent each.

During the first quarter of the year 2004, inflation noted a downward trend, namely 5.11 percent (y.o.y) due to the decrease of inflation rate in foodstuff components, lower impact of administered prices, and relatively stable of rupiah exchange rate.

In July 2004, inflation recorded a 15-month high of 7.2 percent higher than annual rate target of 6.5 percent. The rise was mainly due to increasing prices of foods and other basic commodities.

INTEREST RATE

The benchmark interest rates of Bank Indonesia (Central Bank) promissory notes (SBI) have been enjoying a downward trend.

At the end of the year 2003, the 3-month SBI stood at 8.34 percent, down from 13 percent at the beginning of the year 2003, and lower than the target of 10.1 percent.

For the year 2004, the benchmark interest rate of 3-month SBI is projected at 8.5 percent on average. In April 2004, it was recorded at 7.25 percent.

Following this trend have been credit interest rates, particularly deposit interest rate. In the first quarter of 2004 the 1-month deposit interest rate was 5.99 percent, and 3-month deposit interest rate 6.98 percent.

RUPIAH EXCHANGE RATE

On average, rupiah exchange rate during the first quarter of the year 2004 was relatively stable compared to that of the fourth quarter of the year 2003, recorded at Rp8.469 per US$. The figure is close enough to the previous estimate of Rp8,300 to Rp8,500 per US$ on average. Attributable to the relatively stable rupiah exchange rate were more favorable domestic economic fundamental factors that promote domestic foreign exchange supply, positive market expectations towards rupiah value movement, increasing investors' confidence on account of up-grade sovereign rating by Moody's international rating agency, as well as greater socio-political stability.

Rupiah exchange rate in April 2004 was recorded at Rp8,691 per US$, or declining by 1.48 percent against that of March 2004. This declining trend was attributed chiefly to the strengthening of US$ against other world's currencies following the improvement of the US's macro-economic indicators.

BASE MONEY AND ECONOMIC LIQUIDITY

Base money in April 2004 stood at Rp146.34 trillion. Meanwhile, the total amount of M2 (M1 plus quasi money) reached Rp935.2 trillion, shrinking from Rp935.7 trillion in March 2004. The declining trend of M2 was largely due to lowering demand deposit following the decrease of deposit rate.

At the same time, the position of M1 (currency and demand deposit) changed insignificantly, reaching Rp219.0 trillion.

The relatively unchanged growth of M1 and M2 would hopefully give room to the improvement of public purchasing power and consumption.

CURRENT STATE BUDGET

As of 2002 the Government has been practicing a deficit budget system, replacing the two-decade standing balanced budget policy. The budget deficit has been consequently financed from both internal and external sources. In addition, starting in 2005, as mandated by Law No. 17/2003 on State Finance, the state budget will adopt a new budgetary system called an integrated or united system, which merges routine and development expenditures into single expenditure format.

The 2002 budget deficit was recorded at 2.5 percent of the country's GDP, and in 2003 it stood at 1.9 percent, slightly higher then the expectation of 1.8 percent. For 2004, it is projected to be 1.2 percent and 0.6 percent of GDP in 2005.

The 2004 State Budget features a continuation of the government's endeavors to attain its three major economic policy objectives: (1) achieving favorable fiscal condition and reducing government debt; (2) maintaining sustainable medium-term fiscal policy; and (3) providing a modest degree of stimulus to the overall economy, within the constraints set by the government's fiscal year policies.

The 2004 State Budget earmarked government revenue and grants of Rp349.9 trillion or some 17.5 percent of GDP, and government expenditures of Rp374.4 trillion or some 18.7 percent of GDP. For comparison, budget allocation for government revenue and grants in 2003 totaled Rp341.1 trillion or 17.3 percent of GDP, and expenditures totaled Rp 374.8 trillion or 19.1 percent of GDP. It means government expenditures in 2004 are budgeted to shrink to 18.7 percent of GDP from 21.3 percent in 2003; and development spending are budgeted to decline to 3.5 percent from 3.7 percent in 2003.

The largest shares of the development budget are allotted to education, transportation, health, social assistance and programs aimed at poverty alleviation.

Of the total government revenues in 2004, tax revenues are projected to reach Rp272.175 trillion or some 13.6 percent of GDP; and non-tax revenues to reach Rp77.124 trillion or some 3.9 percent of GDP.

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Pursuant to Law No. 22 of 1999, a significant proportion of central government revenue goes to provincial and local governments. Revenues apportioned for provincial and local governments are derived from taxes and natural resource revenues. The 2004 budget allocates some 31.8 percent of central government expenditures for provincial and local governments, compared to some 32.2 percent in 2003.

THE PROPOSED 2005 STATE BUDGET

The proposed 2005 State Budget portrays key assumptions used to estimate expenditures and revenues are quite conservative. It estimates a GDP growth of 5.4 percent, an average rupiah exchange rate of Rp 8,600 to one US dollar, interest rate at 6.5 percent, inflation 5.5 percent, and average international oil price at US$24 a barrel. It also predicts a budget deficit of 0.8 percent, down from 1.2 percent at current year.

The budget envisages higher government's expenditures of Rp 264 trillion than that of previous year, which amounted to Rp255.3 trillion. Those which would receive larger proportion are ministries of defense, education, settlement and infrastructure, health, and the National Police. Of the proposed total government expenditures, some Rp 22 trillion would go to the Defense Ministry, Rp 21.5 trillion to the Ministry of Education, Rp12.4 trillion to the Ministry of Settlements and Infrastructures, Rp11.2 trillion to the National police, and some Rp 7.4 trillion to the Ministry of Health.

The budget also envisages tax revenues of Rp297.5 trillion (US$32.11 billion), higher than the 2004 tax revenues target of Rp 260 trillion.

TAXATION

As of 2001 the share of tax receipts to government revenues has been noting an increasing trend. In 2001, tax revenues accounted for some 61.6 percent of the total government revenues. The figure then grew to some 70.0 percent in 2002 and 75.6 percent in 2003.

In 2003, realized tax revenues were 97.2 percent of the year's target; domestic tax revenues were 97.3 percent; and international tax revenues 98.8 percent of the target.

In the context of augmenting the share of tax revenues to the government revenues in 2004, endeavors have been focused on tax and custom administration reform. The reform includes improved utilization of modern technology, regulatory reform, institutional developments, and improvement of quality of human resources. Parallel with this, the scheme to minimize arrears has been more intensified due to increasing tendency of evading. In 2001, for example, tax arrears amounted to Rp13.3 trillion, and swelled to Rp17.3 trillion in 2002, before decreasing slightly to Rp17.1 trillion in 2003.

For 2004, tax revenues are projected to amount to Rp272, 2 trillion or growing by 7.1 percent from that of 2003. Of the total tax revenues, some 49.2 percent derives from income tax and some 31.7 percent from value-added tax as well as tax on luxurious goods.

By value, realized tax revenues during the first quarter of 2004 amounted to Rp 51.5 trillion or an increase of 15 percent compared to that of the corresponding period in 2003.

Tax ratio in 2003 stood at 13.1 percent of GDP, and for 2004 it is projected to reach 13.6 percent, a slight increase from the target of 13.5 percent, but still below those of neighboring countries, which ranges between 14 percent and 15 percent.

In helping to improve and boost domestic businesses in order that they enable their outputs to meet both local and overseas demands, the 10-percent value-added tax on the import of certain capital goods and raw materials by several industries has been waived, and the luxury tax on 45 products eliminated.

FOREIGN DEBT

It has been a key policy of the Government since 1997, when financial crisis hit the country as well as other Asian countries, to reduce public debt in percentage of GDP. So far, the fruit of the policy has been tangible: Its external debts as a percentage of GDP shrank from a peak of 65.3 percent in 1998 to 49.5 percent in 2000, further to 47.5 percent in 2001, to 43.1 percent in 2002, and to 39.1 percent of GDP in 2003.

The country's total debt repayment is expected to reach US$21.01 billion in 2004, down from the estimated US$28.31 billion in 2003. Of the total debt repayment, around US$16.24 billion would be for the payment of principal, and the remaining US$4.77 billion would be the interest.

Up to March 2004, the country's outstanding foreign debt amounted to US$136.10 billion, up from US$134.40 billion during the previous month. Attributable to the increase was the raise in official foreign debts of US$81.197 billion from US$80.01 billion previously.

On the contrary, the outstanding private debts slightly shrank from US$52.77 billion in February 2004 to US$52.39 billion in March 2004. The decrease was chiefly due to the lower outstanding private debt of non-financial institutions, whereas the bank and non-bank private debt augmented.