INDONESIA DIGEST Indonesia's complex Issues in a Nutshell By: Ms. Wuryastuti Sunario Published by: TBSC-Strategic Communication
No.: 04.07 - Dated: 3 February 2007 Our apologies for the very late arrival of this issue, which was originally set for distribution on 3 February, the day the February floods inundated the PT Telkom exchange. We are very sorry for any inconvenience caused. In this issue: MAIN FEATURE: BUILDING REGIONAL ECONOMIES AND THE REGIONAL REAL SECTOR NEWS AND BACKGROUND: 1. Tourism and Transportation: Indonesia's 2007 tourist arrival target to be revised Upwards Middle East Investor to resume Lombok Tourism Estate Construction 2. The Economy, Trade and Industry Government Pledges to Aid Fishing Industry 2006 Advertising Spending Up 17%, says Nielsen Manufacturing Seen Picking Up in 2007 --------------------------------------------------------------- MAIN FEATURE: BUILDING REGIONAL ECONOMIES AND THE REGIONAL REAL SECTOR One of Indonesia's crucial economic problems today lies in the fact that despite much improved macro-economic indicators, yet the real sector has remained stagnant, while most regional economies have remained sluggish. On the macro-economic front, economic growth in 2006 reached 5.5%, inflation for the year was pressed down to 6.6%, down from the 17.1% the year before. Exports reached a record US$ 100 billion value, the highest since the Asian economic crisis in 1997, while the Rupiah strengthened to Rp. 9,000 to the US Dollar, and the central bank again reduced its interest rates by 25 points to 9.5%. So, why is it then, that in spite of the above positive economic signs and reformed legislation, where a large part of national budget is today remitted to the regions for implementation, - instead of being spent at national level - industry has been declining and regions have not shown much improvement. Recent financial studies on this anomaly have shown that instead of spending these funds on development programs, most regions have preferred to place these in deposits or in BI certificates at their own regional development banks, to ensure availability of cash at a moment's notice, thereby withholding funds that should have been channeled to the private sector and the community to improve industry and agricultural activities. To correct this situation, Minister of Finance, Sri Mulyani, has instructed autonomous regions to spend the funds that have been transferred to them to be utilized immediately, - rather to remain idle in banks - in order to advance regional economic activities. In a parallel action, the central bank, Bank Indonesia has re-activated its regional branches to ensure faster availability of loans, in particular to the real sector. Bank Indonesia Deputy Governor, Muliaman Hadad, told the Kompas daily that one of the main focal points in the Bank's development program for 2007 is the economic development of regions. For this reason the central bank has revitalized the function and roles of its regional branches to support the real sector. According to Bank Indonesia data, there is a huge imbalance in the distribution of loans in Indonesia. Jakarta alone absorbs 50% of all bank loans amounting to Rp. 382.27 trillion out of total of Rp. 767.07 trillion nation-wide. This means that the remaining 50% are channeled to no less than 29 other provinces. To correct this imbalance, BI will act as a center for information and data analysis at national, regional and sectoral levels, said Hadad. In response, BNI bank said that it has given the authority to its regional heads to decide on loans of up to Rp. 25 billion. Whilst BII said that it has long since decentralized powers to its regional heads to decide on regional loans. But not only Regional Banks are slow in channeling loans. National Banks are similarly slow in providing loans to the real sector for fear of non-performing loans. In an article in Bisnis Indonesia of 30 January, economist Rofikoh Rokhim wrote that of the total BI certificates of Rp. 212 trillion, some 40% are controlled by Regional Banks, of which the larger amounts are development funds for the account of Regional Governments. There is nothing wrong with prudence, said Rokhim, however, when funds are lying idle in the banks, whilst these were in fact intended to boost the local economies, this becomes one of the main reasons why regional development has remained at a standstill. A number of problems exist at the regional leadership, both at local Government as well as local parliament, said Rokhim, and they include : firstly: there is a lack of proper planning at regional level, while the decision-making process at the executive as well as the legislative levels is slow, with the result that regions have problems to absorb the allocated budget funds. Secondly, regions consider Regional Banks as an important asset, and these are, therefore, not free from political interests and wrangling. Thirdly, Regional Parliaments seem to indicate that there must be an increase in Regional Earnings (PAD). Therefore, in order to show on record that increased amounts have been earned by regions, funds are deposited at the regional banks. Fourthly, Credit managers at the Regional Banks are also too slothful to study business potentials and regional prospects in their regions, including to find out what are existing business drawbacks and risks. Fifth, local Parliaments' endorsement to the 2006 budgets in all of the 467 autonomous regions have proceeded very slowly indeed, with the result that only 20% of the allocated budget was absorbed during the first quarter, 55% in the second quarter and 69% in the third quarter. Sixth, regulations on government procurement are overly complicated, causing slow implementation of projects. In all, continues Rokhim, credits channeled by all banks grew by only 11% from a targeted 18%, while the real sector at national and regional levels have almost grounded to a standstill. A number of options to solutions suggested by Rokhim are: Firstly, there must be strong leadership at regional level, so that regional planning and implementation of the budget can be executed according to plan and timing. Secondly, regional parliaments should change their paradigm of thinking. Namely that improving regional economy through increasing the activity of the real sector is more important than merely enriching the coffers of the region in banks. Thirdly, Regional Governments as owners of Regional Banks must not only underline profits for these banks but also regional banks' ability to channel loans for investments and industrial activities, since it is only through economic activities that the welfare of local communities can be improved. Fourthly, Regional Banks should increase the number of bank managers who are capable of channeling loans to various kinds of industries. Fifth, Regional Banks must strengthen their function as intermediary institutions, and focus on offering loans to specific segments of industry that offer best potentials to the region. Sixth, local governments and local parliaments must accelerate the formation and debate on the annual budget, to be approved one month before due implementation. The Minister of Finance and Minister of Internal Affairs have together issued regulations, that provide sanctions to regions that can only show large incomes and investments, but neglect to implement the 24 areas of powers that are now entrusted to them as autonomous regions, that include, among others, the areas of health, development planning, transportation, the environment, land tenure, population issues, gender, labour issues, cooperatives, investments and others. (Sources: Kompas, Bisnis Indonesia ) (Tuti Sunario) --------------------------------------------------------------- NEWS AND BACKGROUND: 1. Tourism and Transportation: Indonesia's 2007 tourist arrival target to be revised Upwards Rumours had been circulating in tourist industry circles that in a recent Cabinet Meeting, Vice President Jusuf Kalla had urged Minister for Culture and Tourism, Jero Wacik to review upward Indonesia's tourism arrival target for 2007, from 5.5 million - as projected by the Department - to 7 million, to be followed by 8 million in 2008 and 9 million in 2009. However, no official statement was yet forthcoming. In his latest meeting with the media, Director General for Tourism Marketing and Promotion, Thamrin Bachri, still mentioned 5.5 million international arrivals as Indonesia's official 2007 target (See Indonesia Digest 03.07). It was Bisnis Indonesia's Erwin Nurdin, who checked with the office of the VP Jusuf Kalla on this point, and received confirmation that the Vice President had indeed urged Minister Jero Wacik to revise the 2007 arrival target to 7 million. This is considering that Indonesia owns such an abundance of natural, cultural and man-made attractions, that as a country we should actually surpass tourist arrivals to Singapore and Malaysia, was Jusuf Kalla's reasoning. Singapore this year targets its international visitors close to 10 million, while Malaysia hopes to receive almost 20 million tourists. Asked on this matter, Minister Jero Wacik replied that he had indeed received the request from the Vice President, but that the possibility of such increase was still being studied in more detail by his Ministry. The Ministry's official target will be announced only after the next coordinating meeting with the Vice President early February, said Minister Jero Wacik. Indonesia still faced a number of negative perceptions in the market, said the Minister, therefore, the earlier set target of 5.25 million to 5.5 million arrivals for 2007 was made, expecting the larger percentage of visitors to enter through Indonesia's main entry ports of Jakarta, Bali and Batam. While Indonesia's priority markets continue to be the traditional markets of Singapore, Japan, Taiwan, Malaysia, Germany, Australia, Great Britain, the Netherlands and South Korea, with inroads being made into the new markets of China, India and the Middle East. In 2006, Indonesia failed to reach the 5 million target, having received 4,796,603 visitors, a shortfall of some 4 percent below target. Similarly this figure was down 4 percent compared to 2005 arrivals of 5,002,101, reports Bisnis Indonesia. Meanwhile, balidiscovery.com reported that total foreign tourist arrivals to Bali ended the year 2006 at 1,260,317. Despite a shortfall against arrivals in 2005, Bali arrivals built strength on long-haul markets from the Americas and Europe, while arrivals from its four largest source markets of Japan, Australia, Taiwan and South Korea remained sluggish. Middle East Investor to resume Lombok Tourism Resort Development The Lombok Tourism Development Center (LTDC) has attracted investors from the Middle East to develop the area into an integrated tourism resort akin to the Nusa Dua in Bali, reported Culture and Tourism Minister, Jero Wacik, after meeting VP Jusuf Kalla. The meeting was also attended by Minister of Finance Sri Mulyani, State-Enterprises Minister, Sugiharto and Transportation Minister Hatta Rajasa. The LTDC development had remained idle since Asia's financial crisis in 1997. As soon as Lombok's new international airport is to become operational starting 2009, the Middle East investors will resume development of hotels, golf courses and other amenities in the area with investments of around Rp. 2 trillion, outside of land costs, said Jero Wacik. They are also keen to promote the Lombok resort working in conjunction with Emirates Airlines to attract visitors from the Middle East, reports Bisnis Indonesia. 2. The Economy, Trade and Industry Government Pledges to Aid Fishing Industry The government has pledged to help revive the country's sea fishing industry by providing more cash collateral this year to boost fishermen's access to bank loans, reported Indonesia's Trade and Investment News published by the Coordinating Ministry for the Economy. Fisheries Minister Freddy Numberi said Monday (15/1/07) his department would disburse Rp173 billion (about $19.2 million), or double last year's total, in cash-collateral credit to more than 5,000 traditional fishermen this year. The scheme will be managed by state-owned lender Bank Rakyat Indonesia (BRI). "We've found that BRI's non-performing loans for fishery are less than 1%. This is positive. We will continue disbursing loans to fishermen," Numberi was quoted as saying by The Jakarta Post. BRI director for small and medium enterprises, Sulaiman Arief Arianto, said credit released to the sea fishing industry accounted for only 1.6% of the bank's agriculture credit, which made up 40% of its portfolio. Bank Indonesia (BI) data show that loans to the agriculture sector accounted for only 5% of national banking credit. Most of the funds deposited in banks went to the industrial and trade sectors, accounting for 23% and 20%, respectively. Arianto said most fishermen are not accustomed to banking requirements and few, if any, collateral companies are willing to invest in the high-risk industry due to its dependence on nature. "Most of them are not bankable but are actually quite feasible," he said. The bank itself is ready to extend loans of some Rp200 billion to the sea fishing industry this year. With the new funds, the government expects to focus on boosting the production of shrimp, tuna and seaweed. Last year, Indonesia exported 169,581 tons of shrimp worth about $1 billion, an increase from 153,906 tons in 2005. It is now the largest shrimp exporter to Japan and the second largest to the United States. The total production of seaweed in 2005 reached 910,636 tons and is expected to climb to 1 million tons in 2006. Indonesia is the second largest seaweed exporter in the world after the Philippines. Meanwhile, about 30% of the tuna imported by Japan, which consumes about 70% of the world's total tuna production, comes from Indonesia. "What a shame that the increase of revenue in the country's sea and fishery sector did not bring a significant contribution to the welfare of our fishermen," Numberi said. 2006 Advertising Spending Up 17%, says Nielsen Further, Indonesia's Trade and Investment News reported that Corporate expenditure on advertising in 2006 rose 17% to Rp30 trillion, according to Nielsen Media Research. It noted that TV absorbed Rp20 trillion, or 67%, of the total spending, with the remainder shared by newspapers, magazines, radio and online media, XFN-Asia reported on Thursday (18/1/07). Ananto Praktikno, executive director of Nielsen Media Research Indonesia, said he expects corporate spending on advertising to increase this year in line with the improving economy. Manufacturing Seen Picking Up in 2007 On manufacturing, Indonesia's manufacturing sector output is expected to grow a faster 7.9% in 2007, helped by higher consumption and lower interest rates, an Industry Department official said. The government estimated that manufacturing probably grew 5% in 2006, less than a 6% official forecast made at the start of last year, partly due to weak domestic demand and high interest rates. Manufacturing growth was 4.6% in 2005. "We expect the manufacturing industry to grow around 7.9% this year. The driver will come from private consumption, government expenditure and the construction sector," the department's secretary general, Agus Tjahajana Wirakusumah, told Reuters on Thursday (18/1/07). "The benchmark interest rate (BI rate) is expected to fall. If lending rates fall, it will also help business operations as businesses depend on loans for their working capital and investments," he said. For your comments or further inquiries please e-mail to: [EMAIL PROTECTED]
