Highlights 

Politics 

·         Senior official at Justice and Human Rights Ministry detained on suspicion of graft 

·         Malaysia trespasses on Indonesia’s maritime territory

Regions 

·         Papua governor orders drafting of regulations on special autonomy 

Economy 

·         Inflation in February lower than predicted

·         Government willing to compromise on domestic gas supplies 

Business briefs 

Macroeconomy 

·         Trade surplus narrows in January 

·         Bank Indonesia to issue notes in longer tenors 

Investment 

·         Regional official says $2 billion to be spent on cocoa processing plant 

·         Hyundai Motor to start bus, truck manufacturing 

·         Sugar group to invest $700 million in plant, plantations 

State concerns 

·         Government to encourage steel industry expansion

·         Rice production to fall as planted area decreases  

SOEs

·         South Korea offers submarine-aircraft swap 

·         New PT Telkom president to maintain market lead 

Private sector 

·         Supreme Court rejects suit against PT Indosat sale 

·         Footwear exports grow by 12.3% 

Banks 

·         Central bank calls for 18% loan growth this year 

·         State banks surrender market share to private sector 

Power 

·         Main plant components to be freed of import duty 

·         PT Siemens Indonesia exports giant condensers 

Oil & gas 

·         Nine oil and gas blocks awarded for exploration 

·         South Korea’s KNOC sees major prospect off Papua 

Mining 

·         Political party suggests compromise on mining bill 

POLITICS

Justice Official Arrested

The Anti-Corruption Commission (KPK) on Friday (2/3/07) arrested Justice and Human Rights Ministry secretary general Zulkarnain Yunus on corruption charges.

He was named as a suspect for allegedly marking up the price of an Rp18 billion automated fingerprint identification system in 2004.

Zulkarnain’s lawyer, Hironimus Dani, expressed disappointment over the arrest, saying that the interrogation of his client had not been concluded when he was taken into custody. 

Kalla Lashes Out At Singapore

Vice President Jusuf Kalla has lashed out at Singapore for refusing to sign an extradition treaty with Indonesia, accusing the island state of trying to keep billions of dollars in allegedly corrupt money siphoned out of Indonesia by fleeing tycoons during the 1997-98 financial crisis.

"Singapore often says there's so much corruption in Indonesia. But when we want to work together on combating corruption, they don't want to," Kalla said in an interview with the Financial Times published on Wednesday (28/2/07).

Singapore has said that President Susilo Bambang Yudhoyono and Singaporean Prime Minister Lee Hsien Loong agreed in 2005 that any extradition treaty could only be signed together with a defense co-operation agreement.

But Kalla dismissed that claim. "They're thinking on the business side. If this treaty is signed then the corrupt Indonesians won't want to live in Singapore any more. That's all it is. It strengthens Singapore's economy."

Malaysians in Repeat Incursions 

Malaysian warships and aircraft have once again encroached into Indonesian territory in the disputed Ambalat region off the coast of East Kalimantan, the Indonesian Navy disclosed on Tuesday (27/2/07).

Eastern Fleet spokesman Lt. Col. Toni Syaiful said the repeated incursions had all taken place on February 24 and 25 – the first time since 2004 when the two countries engaged in a war of words over their overlapping claims to the oil-rich Ambalat area in the Sulawesi Sea.

Members of Parliament’s defense commission, including deputy chairman Yusron Ihza, Untung Wahono and Jeffrey Massie, urged the government on Wednesday to be daring enough to take offensive action if the incursions persist.

"This is an issue of [national] pride,” said Izha. “The government must be firmer in its actions. Troops guarding the border must be daring enough to shoot so that there are no further incidents of this nature.”

A firm attitude on the government's behalf, he continued, would stop Indonesia from becoming the target of neighbors wanting to display their military force.

House Backs De-radicalization Drive 

The House of Representatives on Monday (26/2/07) threw its weight behind a government "de-radicalization campaign" aimed at stopping the establishment of hard-line religious groups and countering terrorism.

In a hearing with Coordinating Minister for Political, Legal and Security Affairs Widodo AS, members of the House commission on defense, political and foreign affairs also said the government should make a concerted effort to deal with poverty, unemployment and underdevelopment, which they said contributed to terrorism and violence in the name of religion.

Also attending the hearing were Home Minister M. Ma'ruf, Defense Minister Juwono Sudarsono, Maritime Affairs and Fisheries Minister Freddy Numberi, Armed Forces Commander Air Marshal Djoko Suyanto, National Police chief Gen. Sutanto and National Intelligence Agency head Syamsir Siregar.

"De-radicalization is urgently needed to improve the people's awareness of terrorism and ensure an understanding of religion and their teachings. The problem is not religions themselves but some of the people who claim to be adherents. Such a move will help the government win full support from the people to counter terrorism," commission chairman Theo Sambuaga said at the conclusion of the hearing with the political and security ministers.

The head of the anti-terrorist desk at the Coordinating Ministry for Political, Legal and Security Affairs, Ansyaad Mbai, said the government has enhanced cooperation with religious leaders, clerics and communal leaders to prevent the misuse of religious teaching to justify terrorist attacks.

Awareness of Graft Growing

Transparency International's 2006 corruption perception index for Indonesia has found increasing awareness among local politicians of the need to combat corruption. 

The index is the result of a survey held between last October and January in 32 cities across Indonesia, with a total of 1,760 respondents from small, medium and large-scale enterprises, both domestic and foreign.

"Local leaders have shown an increased commitment to fighting corruption, although it is still an intrinsic, pervasive and existing phenomenon (in Indonesia)," said Transparency International Indonesia chairman Todung Mulya Lubis.

Emerging democracy, global anticorruption and anti-money laundering campaigns by the United Nations and other institutions had driven local officials to take the initiative in fighting graft, he told a press conference on Tuesday (27/2/07). "Many officials are now afraid to commit corrupt practices.”

Militant Gets 12-year Sentence

A militant charged with carrying out an armed robbery with one of the country's most wanted militants to help finance terrorism was sentenced to 12 years in prison on Monday (26/2/07).

Prosecutors said 22-year-old Mustagfirin took part in a 2005 hold-up with Noordin Muhammad Top, a key member of the Jemaah Islamiyah extremist network, blamed for several deadly attacks including the 2002 Bali bombings.,

Mustagfirin was found guilty of illegally possessing firearms and taking part in a robbery to finance other acts of terrorism, the Detikcom online news portal said.

Prosecutors had recommended a 15-year sentence. Defense lawyer Arif Widada said his client was considering an appeal.

Mustagfirin was captured in an April 2006 raid that saw two other suspected militants killed and a third captured.

REGIONS

Papua Drafts Autonomy Ordinances

Papua Governor Barnabas Suebu on Tuesday (27/2/07) ordered the establishment of a joint team to draft local ordinances and regulations necessary for the implementation of special autonomy in the province.

"It is necessary to have a team really working to complete the regulations. It's been five years since the autonomy law was being issued but it is not backed up by local regulations. A law can only work if there are regulations which control its implementation," Barnabas told reporters in Jayapura after attending a legislative council session to discuss the province's 2007 draft budget.

The team is expected to work thoroughly, and is expected to finish by the end of this year, the governor said. 

The special autonomy team will comprise administration officials, legislative council members, members of the Papua People's Council (MRP) and members of the team that drafted the 2001 Papua Special Autonomy Law. He said the team had less than a year to complete its work.

Papua Legislative Council Speaker John Ibo welcomed the governor's plan, saying it would help speed up the drafting and deliberation of local ordinances needed for the implementation of the special autonomy law.

 "I support the team's formation, which is a breakthrough from the governor," Ibo said.

Reserves on Alert along E. Timor Border

The Indonesian Armed Forces (TNI) has put reserve troops along the East Timor-Indonesia border on alert in anticipation of the security situation in East Timor deteriorating, the regional military commander said on Tuesday (27/0/07).

"We have not increased troop numbers along the East Timor-Indonesia border, but reserve troops are on alert," said Wirasakti Commander Col. Arief Rachman in Kupang. The action has been taken following a return to factional infighting in East Timor's military, he said.

Reserve troops from 744 Infantry Battalion based in Kupang, East Nusa Tenggara, are ready to assist troops already deployed along the border. According to Col. Rachman, TNI is not anticipating that rebel leader Maj. Alfredo Reinado, his troops or East Timor citizens will cross illegally into Belu, in Indonesian territory.

Reinado, once the military police chief, who escaped from prison in September after leading dozens of armed mutinous soldiers into the mountains, has been encircled by UN peacekeepers but is refusing to surrender. 

Indonesian troops will also closely monitor unofficial routes across the border, often used by East Timorese wanting to purchase food and fuel from villages close to the border. 

 ECONOMY

Marginal Rise in Inflation 

The consumer price index (CPI) rose only marginally in February, boosting expectations that the central bank would cut its benchmark interest rate again, but Bank Indonesia Governor Burhanuddin Abdullah said many other factors had to be considered. 

The CPI increased 6.3% on year in February, compared with 6.26% a month earlier, the Central Bureau of Statistics said. On month, the CPI rose 0.62%, compared with 1.04% in January.

Rising food prices were the main contributor to February's inflation, but the relatively low rise demonstrated that imports of rice have restrained further rises in the price of the staple. 

Abdullah warned, however, that inflation was not the only factor to be considered in deciding whether there should be another rate cut. He pointed to regional and global factors, including China's efforts to slow the growth of its economy and the problem of global imbalances.

The current one-month Sertifikat Bank Indonesia benchmark rates stands at 9.25%. 

The trade surplus fell to $3.11 billion in January from $4.56 billion a month earlier, the Central Bureau of Statistics said Thursday (1/3/07). Export performance was dragged down by a $378 million drop in crude palm oil exports, but officials said exports regularly fall in January as contracts are renegotiated. 

Trade Minister Mari Pangestu said on Monday that non-oil and gas export growth is likely to slow to 14.5% in 2007 from 19.7% in 2006 due to external factors.

On the investment front, Hyundai Motor said it would start producing trucks and buses at a new Indonesian plant this month, while officials also said a tax amnesty was being considered to boost investment. 

Investors were also reassured by a ruling of the Supreme Court, which threw out a suit by a group that the sale of a 41.9% stake in PT Indosat to a unit of Singapore’s Temasek Holdings was unconstitutional. 

Indicators: 

Source: Central Agency of Statistics

BUSINESS BRIEFS

MACROECONOMY

February CPI May Prompt Rate Cut

The consumer price index (CPI) rose less than expected in February, boosting expectations that the country's central bank would cut its benchmark interest rate on Tuesday (6/3/07).

The CPI increased 6.3% on year in February, compared with 6.26% a month earlier, the Central Bureau of Statistics said. On month, the CPI rose 0.62%, compared with 1.04% in January.

Rising food prices were the main contributor to February's inflation, bureau deputy chairman Pietojo was quoted as saying by Dow Jones Newswires on Thursday (1/3/07).

The data will reinforce assessments that inflation has been contained and likely prompt Bank Indonesia (BI) to cut its benchmark one-month rate, currently at 9.25%, by 25 basis points when it meets Tuesday, said David Cohen, an economist at Action Economics. 

"I should think that this data would help (ease the concerns of) those who might have been more fearful of inflation and should open the door to another 25 basis points cut," Cohen said, adding that he expects the benchmark rate to bottom at 8.5% this year.

BI Governor Burhanuddin Abdullah was much less sanguine about the influence of February's inflation data on a possible rate cut decision.  "If we look at inflation only, there's still room for a rate cut, but we also have to consider regional and global (economic) factors during our meeting (on Tuesday)," Abdullah said, adding that those factors include China's efforts to slow the growth of its red-hot economy and the problem of global imbalances. 

A rate cut on Tuesday would be the tenth since monetary policy loosening began in May last year to help stimulate economic growth.

The government's move to import rice to offset domestic supply shortages that had fueled inflationary pressures was the key to the relatively slight rise in the CPI despite the impact of the severe floods in Jakarta last month, Standard Chartered economist Fauzi Ichsan said.

"The February data tell us that inflationary pressure is likely temporary, and we expect inflation to downtrend over the next few months," Ichsan said.

BI is likely to leave the rate at 9% after the next cut until an expected loosening in the US Federal Reserve target rate in the second half of the year, he said.

Finance Minister Sri Mulyani Indrawati also had a rosy outlook on inflation this year.  She called the February on-year inflation number "a good figure" and predicted that end-2007 inflation may fall below the official target of 6% plus-or-minus one percentage point.

Budget Deficit to Top Target on Floods

The impact of recent devastating floods in parts of Indonesia and higher spending on agriculture is set to push the budget deficit above a target of 1.1% of GDP this year, Finance Minister Sri Mulyani Indrawati said on Friday (2/3/07).

Despite the bigger deficit, she said the government would stick to a plan for only one global bond issue this year.  

A second issue of retail bonds on March 28 will carry a coupon rate of 9.28%, she said. 

"Looking at the current situation, I think the budget deficit is likely to be higher and would be impossible to be lower," she was quoted as saying by Reuters, referring to the government's target of 1.1% of gross domestic product this year.  "It is because of extra spending due to recent flooding, and a target for raising rice output by 2 million tons."

As part of efforts to develop the domestic debt market, the Finance Department plans to issue treasury bills in April and to hold one auction each month, Indrawati said, adding that she hopes that the yield on bills will be lower than 8%.

The Finance Department also unveiled the names of 18 primary bond dealers appointed by the government in an effort to boost the trading of government securities.  The list includes major local banks such as Bank Mandiri and Bank Central Asia, and foreign houses like Citibank, Deutsche Bank, HSBC and Standard Chartered.

International Reserves Rise to $45.69b 

International reserves rose to $45.69 billion at the end of February from $43.27 billion at the end of January, central bank data showed on Thursday (1/3/07).

Bank Indonesia (BI) said on its website that base money fell to Rp270.11 trillion ($29.52 billion) last month from Rp274.71 trillion the month before, according to Reuters.

BI Plans to Issue Longer Term SBIs 

Bank Indonesia (BI) plans to issue six- and nine-month BI Certificate (SBI) notes in the second half of the year, central bank spokesman Budi Mulya said Wednesday (28/2/07).

The planned issuance, which will be addition to existing one-week and one-month SBI notes, are aimed at "diversifying monetary instruments," Mulya said, according to Dow Jones Newswires.

"The interest rate for these SBI (notes) will most likely be determined by the market, unlike the one-month SBI, which is set according to the Bank Indonesia (one-month benchmark) rate," he said.  The benchmark BI one-month rate is currently at 9.25%.

The central bank's plan reflects government efforts to provide longer-term investment options that are less susceptible to jitters over emerging market risk aversion.

Policy-makers want to avoid a repeat of what happened in May last year, when emerging market risk aversion caused the Jakarta index to plummet and caused a 5.5% decline in the value of the rupiah against the US dollar.

The one-week and one-month SBI notes attract short-term investment capital due to the relatively high interest rates on offer.

Indonesian government officials have estimated these "hot money" monthly inflows at up to $1 billion.

INVESTMENT

Uniflora to Build $2b Cocoa Processing Plant 

PT Uniflora will soon build a $2 billion cocoa processing plant in Serang district, Banten province, an official said.

"The plant will be built in Jalung village, Cikande sub-district, Serang district.  Hopefully, it will employ thousands of workers when it is operational," Serang district head Taufik Nuriman said on Wednesday (28/2/07), according to Antara.

Indonesia is the world's third biggest cocoa producer after Ivory Coast and Ghana, producing some 400,000 tons of cocoa a year, 70% of which is exported.  

Early last month, Trade Minister Mari Pangestu said Indonesia has agreed to cooperate with the Association of Chocolate, Biscuit and Confectionary Industries of the European Union (COABISCO) in developing cocoa-based industries in the country.

Hyundai to Start Producing Trucks, Buses 

South Korea's leading automaker Hyundai Motor said Wednesday (28/2/07) it would assemble trucks and buses at a plant in Indonesia starting this month.

Hyundai Motor said the plant, which has been built by Indonesia's Korindo Group with an investment of $23 million, would have an annual production capacity of about 3,600 buses and 2,400 trucks.

Korindo Group will be in charge of marketing and sales, it said, according to Agence France-Presse.

Demand for commercial vehicles in Indonesia is forecast to reach 400,000 vehicles this year on the back of an economic recovery, Hyundai said.

Hyundai Motor already has an assembly plant for compact cars and mini-vans in Indonesia.

Hyundai Motor, together with its sister firm Kia Motors, accounts for 70% of South Korea's car market and is the world's sixth largest automaker.

SGC to Invest $700m in Sugar Plantations

The Sugar Groups Company (SGC) has announced plans to invest $700 million in a sugar factory and plantations.

"The company wants to build a sugar factory and expand its sugarcane plantations by 60,000 hectares to 100,000 hectares over a period of two years," president Gunawan Yusuf said Monday (26/2/07), according to Antara news agency.

Yusuf said SGC will rely on the government to provide suitable land for the new plantations in any area in the country.  He said SGC is ready to help develop peatlands in Central Kalimantan and utilize non-productive lands in Sumatra.

Earlier, President Susilo Bambang Yudhoyono promised to provide land for the company in South Sumatra, Papua or Kalimantan to grow sugarcane to produce feedstock for bio-fuel.

STATE CONCERNS

Steel Industry Eyes Higher Production

The government hopes to see the domestic steel industry grow 7% this year and meet more local demand, an Industry Department official said recently.

According to data from the Central Bureau of Statistics, the steel industry grew by 4.73% in 2006 after contracting 3.7% the year before.

The total production of concrete steel, steel wire, Hot Rolled Coil (HRC), Cold Rolled Coil, plates, pipes and steel waffle reached 7.02 million tons in 2006, or about 3.64% higher than in 2005, the department’s Director General for Metals, Machines and Textiles, Anshari Bukhari, said. 

"HRC and plates contributed the most to the industry's growth, with combined production volume increasing by 18.35% to total production of 2.4 million tons last year," he was quoted as saying by The Jakarta Post.

This increase, Bukhari said, came as a surprise because production of HRC and plates fell 2.56% in 2005.  That year, total production of HRC and plates reached just 2.03 million tons, with HRC production volume falling 7.17% from 2004.

According to a report from the department, exports of metal products reached $7.4 billion in 2006, while the country imported about $5.4 billion worth of metal products.  Machinery exports reached $1.8 billion and imports $4.7 billion.

Bukhari said the focus of the domestic steel industry this year would be reducing dependence on imported steel products.  Last year, Indonesia imported about 2.1 million tons, a 10.52% increase from 2005.

"The imports were dominated by steel products of a specific quality or special steel that could not be produced here.  These products were mostly for the automotive and electronics industries," he said, adding that Indonesia's steel industry is only able to produce mainly ordinary steel, and that the production capacity of factories is often hit by shortages of gas and electricity.

2007 Rice Output Seen Falling

Indonesia expects unmilled rice production to fall 2.3% to 53.13 million tons this year from 54.4 million tons in 2006 due to a decrease in planted area, the Central Bureau of Statistics (BPS) said on Thursday (1/3/07).

The outlook is the first preliminary forecast of the year.  BPS makes three projections on a quarterly basis every year.

The forecast is far below the government's target of 58.18 million tons of unmilled rice in 2007.

"The expected decline in rice output is because of decreasing planted areas in Java," Pietojo, the bureau's deputy for economic statistics, was quoted as saying by Reuters.

The government has announced plans to import up to 1.5 million tons of rice this year to stabilize rice prices amid an expected drop in domestic rice production due to erratic weather.

The statistics bureau said corn production is expected to rise by 6.64% to 12.38 million tons this year from 11.61 million tons in 2006 due to an increase in planted area and improving productivity.

Soybean output is expected to fall by 0.47% to 745,530 tons this year from 749,040 tons in 2006 due to a decrease in planted areas despite improving productivity.

Tourism Competitiveness Ranked 

Indonesia has ranked 60th out of 124 in a new global survey on tourism competitiveness, The Jakarta Post reported.

Switzerland, Austria and Germany have the most attractive environments for developing the travel and tourism (T&T) industry, according to the very first ranking of its kind in the Travel & Tourism Competitiveness Report 2007, released Thursday (1/3/07) by the World Economic Forum (WEF).

Iceland, the US, Hong Kong, Canada, Singapore, Luxembourg and the United Kingdom complete the top ten list, the WEF announced in a statement from Geneva.

Indonesia’s foreign tourist arrivals in January was up 6.91% year-on-year to 317,568.

Bali was the biggest draw with 115,557 arrivals in January, an increase of 35.86% year-on-year, the data showed, according to Agence France-Presse. 

SOEs

S. Korea Offers Submarine-Plane Swap 

The state-owned aircraft factory, PT Dirgantara Indonesia (PT DI), may get an order for 19 of its aircraft in exchange for a South Korean submarine for the Navy. 

"South Korea will buy 19 CN-235 medium transporters from Indonesia if the Indonesian Navy is willing to a buy a South Korean submarine," PT DI corporate secretary Mochtar Sharief was quoted as saying by Antara.

"South Korea has guaranteed the purchase will be carried out this year. Otherwise, they will buy the airplanes from Spanish aircraft maker CASA."

The CN-235 was jointly developed by Indonesia and Spain and is widely used by a number of foreign operators and countries, including the US Coast Guard, Malaysia, Thailand and the United Arab Emirates.

South Korea has previously purchased a number of CN-235s for VIP and transport units in a trade deal with Indonesia, which bought a squadron of KT-1 Wong Bee trainer planes.

Mochtar said the company also expected to soon seal a deal selling 20 planes to a number of Mideast countries.

Thailand will also buy one CN-235 for cloud seeding and nine smaller NC-212 Aviocar planes for the Thai military.

Telkom to Focus on Growth

PT Telkom’s new president, Rinaldi Firmansyah will focus on expanding the company’s networks to thwart rivals, Bloomberg News reported on Thursday (1/3/07).

"The competition is out there, not within Telkom," Firmansyah said.  "We'll accelerate building infrastructure and information technology.  We will solidify human resources." 

Firmansyah, 46, was promoted from the post of chief financial officer to head the state-controlled company after Arwin Rasyid quit Wednesday (28/2/07).

Firmansyah, who is a chartered financial analyst with a degree in electrical engineering from the Bandung Institute of Technology, has a brief to lift the share price of Telkom, the country's biggest publicly traded company, by half in three years and tackle competition, including new entrants from overseas.

HIs engineering degree will give him a "better feel of how the engineering-dominated ranks at Telkom think," Richard Moe, an analyst with Macquarie Securities, said Thursday in a note to investors.  It will be much easier for Firmansyah to manage the systems put in place by Rasyid "because he doesn't carry the baggage of forcing these systems on Telkom staff".

Telkom's chief operating officer, Garuda Sugardo, also resigned Wednesday and the post has so far been left vacant.  Sudiro Asno replaces Firmansyah as the finance director. 

Jasa Marga Plans IPO Worth Up to $328m 

State-owned toll road operator PT Jasa Marga aims to sell up to 30% of its shares in an initial public offering in the second quarter to raise up to Rp3 trillion ($327.8 million), president director Frans Sunito said on Thursday (1/3/07).

Jasa Marga wants to strengthen its capital base, which would enable it to increase borrowing to finance new projects, he said, noting that the company plans to build three toll road projects in Java at an estimated cost of Rp9 trillion.

"The process is on its final stage.  How much stake we will sell will depend on further evaluation.  But it will not exceed 30%," Sunito was quoted as saying by Reuters.

Last month, the Office of the State Minister for State Enterprises said it plans to offload 49% of Jasa Marga, one of 15 state firms on this year's privatization list.  Jakarta aims to raise Rp3.3 trillion this year from selling stakes in state firms through initial public offerings or secondary public offerings, rights issues or sales to strategic investors.

PRIVATE SECTOR

Indosat Sale Legal, Rules Supreme Court

The Supreme Court has thrown out a lawsuit against the government over the privatization of telecommunications company PT Indosat, in which a subsidiary of Singapore's Temasek Holdings has a substantial stake, The Straits Times reported on Thursday (1/3/07).

The suit was first filed more than three years ago by a group against the Indonesian government, Temasek subsidiary ST Telemedia, and Indonesia Communication Ltd, a Mauritius-based company.  The plaintiffs argued that the December 2002 privatization of the state-owned company, which they said was a strategic state asset, violated the Constitution.

But the court has ruled that the sale was legal.  And it said that not only did the plaintiffs fail to prove that the privatization was against the public interest, they also did not prove that they were acting for the majority of the Indonesian public, whom they claimed were against the transaction.

The Supreme Court ruled on the suit late last year but released its judgment only recently.

Supreme Court Judge Djoko Sarwoko told the Times that the panel of three judges ruled that Indosat's privatization was carried out according to the law.

Temasek bought 41.9% of the shares in Indosat, the country's second largest telecommunication operator, as part of a wider privatization program under the Megawati Sukarnoputri administration.  The Indonesian government retained 14.5% of Indosat shares while the rest were held by private investors, mainly Indonesians.

Sarwoko said that although Temasek has a substantial stake, Indosat could not be said to be fully under “foreign control”.  He added that, in accordance with the law, foreign ownership in Indosat “does not exceed 85%”.

He also said that nullifying the deal would damage Indonesia's reputation as a country that welcomes foreign investment.  “The international community's confidence in the security of foreign investment here would be undermined and this would affect the Indonesian public interest,” he said.

2006 Shoe Exports Rise, but Below Target

Indonesia's footwear exports rose by 12.3% in 2006 but failed to meet a 16% growth target. Indonesian Footwear Association (Aprisindo) chairman Eddy Widjanarko said Wednesday (28/2/07) that most local shoe producers had been unable to benefit from the two-year export restrictions imposed by the US and Europe on China and Vietnam due to a "lack of government support".

The value of footwear exports rose by 12.3% to $1.6 billion from $1.4 billion in 2005.  In terms of volume, exports increased by 12.1% to 176 million pairs last year from 157 million in 2005.

"That was not the increase we were hoping for.  The value of our exports could have actually reached the targeted $1.8 billion," he was quoted as saying by The Jakarta Post.

"Indonesia, unlike India, Thailand, Bangladesh and Pakistan, is not benefiting enough from the anti-dumping restrictions imposed on the two countries between 2006 and 2008," he said.  India, for example, succeeded in doubling its footwear exports from $1.5 billion in 2005 to $3 billion last year.

Widjanarko said that to be able to compete in the global market, the footwear industry needs government support in the form of improved infrastructure.  

BANKS

Banks Gear Up for Higher Loan Growth

Bank Mandiri is expected to lead a sector-wide rise in profits this year on the back of an expected increase in loan growth and lower bad debts as interest rates fall from three-year peaks, Reuters reported on Tuesday (27/2/07).

A sharp increase in rates last year crimped demand for loans, putting the brakes on the consumer sector, a major economic driver.  Demand is likely to return this year with rates down at 9.25% from a high of 12.75% last year.

Bank Indonesia (BI) is hoping the $187 billion banking industry will see an 18% growth in loans this year, up from 14.1% last year.  Some analysts are more bullish.

"I think a 20% loan growth target is achievable, considering inflation seems to be under control and we can see some infrastructure projects have started," Tjandra Lienandjaja, senior associate director at BNP Paribas Peregrine, said.

Analysts forecast the banking sector would post 33% to 40% net profit growth this year, roughly doubling an estimated 19% rise last year.  "The outlook for the sector is good.  As for profitability, I forecast 40% growth in 2007 earnings per share (EPS)," said Fendi Susiyanto, head of research at BNI Securities.

Analysts say interest rates will continue to fall this year, spurring an economy already on the road to recovery.  Lower rates will also help push the industry's net non-performing loans (NPL) ratio closer to -- or even below -- the central bank's 5% guidance, analysts say.

The net NPL ratio was at a high 8.9% last July, with some banks such as Bank Negara Indonesia (BNI) badly hit when the central bank hiked the benchmark BI rates after inflation rose to six-year highs at end-2005.

"The tendency in NPL level is for it to go down.  I predict it can fall below 5% this year for the overall (industry)," said BNI's Susiyanto.  "NPL should be manageable this year, so long as we do not see surprises in inflation."

State Banks Losing Market Share 

State banks continue to be at the top three spots in the list of lenders in terms of assets, but they are losing market share to private banks.

By the end of 2006, private banks had a 42.2% share of the credit market, leaving state banks farther behind with a market share of 36.34%, president of state-owned Bank Negara Indonesia (BNI) Sigit Pramono said, according to an Antara report on Wednesday (28/2/07). The remainder of the market was taken by finance companies. 

Pramono said all banks in the country recorded slower growth in credit expansion last year, with private banks suffering the biggest setback in credit expansion, though gaining in market share.

Credit expansion by private banks fell to 13% last year from 31% in the previous year, he said, adding that state banks’ credit expansion rate declined to 12% from 15%.

Smaller distribution of dividend allowed private banks to expand more credit to the real sector.  Private banks distributed about 30% of their profit last year while state banks were required to pay 50% of their net profit to the state in dividend.

BNI Eyes 20% Loan Growth

The country's third largest lender, Bank Negara Indonesia (BNI), is aiming to expand its outstanding loans by 20% this year, director Ahmad Baiquni said on Thursday (1/3/07). 

The state bank's outstanding loans reached Rp66.4 trillion ($7.27 billion) last year, Baiquni said, adding that most of the loans are expected to help finance palm oil and rubber plantations.  

The bank also plans to lend more to back the country's infrastructure projects, which are aimed at supporting higher economic growth.  "Over the next five years, BNI will allocate Rp21 trillion of loans for infrastructure financing.  This year, we are setting aside Rp4.5 trillion to Rp5 trillion," he was quoted as saying by Reuters.

Meanwhile, BNI president Sigit Pramono said the bank’s shareholders have approved the management's proposal to write off the principal portion of its bad loans worth Rp2 trillion, XFN-Asia reported on Thursday.

He said the write-off reduced the bank's net non-performing loans (NPL) to 5.67% of total loans as of end-2006 from 11.58% as of September.  The bank had outstanding loans of Rp66 trillion at the end of last year.

Pramono said he expects the bank's NPL ratio to decline further to 2.69% by year-end with its loan portfolio projected to grow by 20% this year.

BRI to Buy Small Bank, Buy Finance Co 

Bank Rakyat Indonesia (BRI) is allocating Rp1 trillion ($110 million) to acquire a small local bank and open several branches this year, president director Sofyan Basir said, according to Bisnis Indonesia.

Basir said BRI will convert the bank it plans to buy into an Islamic shariah banking unit.  He did not name the bank BRI plans to acquire.

He further said that BRI had decided to drop a plan to buy a 55% stake in PT UFJ Finance. He did not elaborate.

POWER

Siemens Exports Power Condensers

PT Siemens Indonesia dispatched Tuesday (27/2/07) a shipment of three giant power condensers worth about 10 million euro (some $13 million) to the company's Olkiluoto 3 nuclear power plant project in Finland.

The condensers, each of which weigh 550 tons and are 17 meters long, were shipped to Finland from Banten Port, about 110 km west of Jakarta. 

"The condensers are worth 10 million euros in total, consisting of 4 million euros for local materials and manufacturing, and the remaining 6 million euros for materials from our home country (Germany)," The Jakarta Post quoted Siemens Indonesia commercial manager Lars Lingelbach as saying during a ceremony to see off the shipment.

The condensers are made of 70% local steel and 100% German titanium, according to project leader Mh. Ulil Azmi.

Manufactured between February 2006 and January 2007, the condensers will be used as components in the steam turbines of a new 1,600- MW nuclear power plant on Olkiluoto Island in Finland, which will be built next to the existing nuclear power plants, Olkiluoto 1 and 2.

In its last fiscal year ended September, Siemens Indonesia's total sales reached 15 million euros, up from 10 million euros the previous year. 

Power plant components from Siemens Indonesia are installed in India, Japan, Singapore, Vietnam, Thailand, China, various European countries and the US. 

OIL & GAS

Indonesia Awards 9 Oil, Gas Blocks

The Indonesian government Friday (2/3/07) awarded a total of nine oil and gas blocks to international and local companies, which will invest a combined $411.1 million during the first three years of exploration, Dow Jones reported.

The blocks are believed to hold potential reserves of between 20 and 200 million barrels of oil equivalent.

The Ministry of Energy and Mineral Resources said a consortium comprising of France’s Total SA and Japan's Inpex Corp. won the 2,004 sq km offshore Sungai Mahakam oil and gas block in Kalimantan, while a joint venture between Premier Oil and Mitsui Oil Exploration Co. got a block in the Natuna Sea.

A joint venture between Indonesia's Pertamina and Norway's Statoil ASA obtained the Karama block offshore West Sulawesi. Esso Exploration International, a unit of Exxon Mobil Corp., was awarded with the Mandar block offshore West Sulawesi. The other companies awarded were mostly local, little-known companies.

Other winners include Malaysian energy company M3nergy Berhad, and Canada's Talisman Ltd., which won the exploration rights in the Ujung Kulon block, West Java, and Sageri, West Sulawesi, respectively.

The nine blocks are part of 20 blocks that Indonesia had offered to investors. It failed to attract interest in all of them. Director General of Oil and Gas at the ministry Luluk Sumiarso said the government will re-offer the 11 blocks in April. Sumiarso added that the government hopes to offer around 40 blocks in total this year. 

Luluk said the government would earn total signature bonuses amounting to about $31.45 million. "We hope that the contracts will be signed in mid March at the latest," Luluk said.

Under the production-sharing contracts to be signed with the winners, the government's share of the split will range between 65 and 85%, depending on the location of the blocks.

KNOC Eyes Papua Oil Block Extension

South Korea's state-run Korean National Oil Corp. (KNOC) is seeking to extend an exploration contract on an oil block offshore Papua that could be the biggest untapped discovery in Indonesia, an energy watchdog official said on Monday (26/2/07).

Initial estimates indicate the Wokam block offshore the province of West Papua has 671 million barrel of oil reserves, Achmad Luthfi, deputy chief of BP Migas, told Reuters by telephone.

KNOC has a 10-year exploration contract on the Wokam block that expires this year. "I heard the contractor wants to extend the contract for the Wokam block," said Luthfi. "The Wokam block needs further drilling to determine the amount of oil reserves there."

If reserve estimates prove accurate, the block would top the Cepu oil and gas project in East and Central Java, which is estimated to have recoverable reserves of up to 600 million barrels. 

A KNOC official said the firm had halted activities in the Wokam block as it awaited a government decision on the contract and would only conduct more drilling if it got an extension. "If the government agrees to extend then we are going to continue exploration activities, if not we will leave," said the KNOC official in Jakarta.

Tangguh Set for 2008 Start-Up 

BP's $6.5 billion Tangguh liquefied natural gas project in Papua remains on track for start-up in the fourth quarter of 2008, despite loans worth almost $900 million not being finalized yet, Upstream reported on Friday (2/3/07).

The remote liquefaction project is still aiming to bring into operation the first of its two 3.8 million tons-per-annum trains late next year, said BP Migas chairman Kardaya Warnika. 

Construction work at the project is now 70% complete. Finance deals with a consortium of Chinese banks could be in place by April.

The second train at the project, where costs are continuing to escalate, is due to follow in 2009. The Tangguh partners are already considering a third train gas from which could be directed to customers in North Asia, Pakistan or to the domestic market, according to industry sources.

However, the project operator declined to elaborate on the details of this likely expansion. 

The project's co-venturers are said to be keen to move forward with train three, provided the Indonesian authorities can guarantee that the yet-to-be committed LNG can be exported and there will be no domestic gas supply obligation. 

A third train would give economies of scale to Tangguh, where the capital expenditure now stands at $6.5 billion, up half a billion dollars in less than a year, according to The Jakarta Post.

Meanwhile, BP has started the ball rolling on operations and maintenance (O&M) contracts for Tangguh, and is carrying out a market assessment of contractors' capabilities and experience. 

BP has acquired sufficient land to house an eight-train LNG project. However, expansion on this scale would be dependent on the discovery of more gas reserves.

The Tangguh co-venturers are BP with 37.2%, Mitsubishi and Inpex with 16.3%, CNOOC Ltd on 17%, Nippon Oil on 12.2%, Kanematsu with 10% and Japan LNG with 7.3%.

Indonesia Offers Incentive to Sell Gas Locally

Indonesia is willing to give gas producers a greater share of their output if they sell the gas on the domestic market, Energy and Mines Minister Purnomo Yusgiantoro said Thursday (1/3/07).

Under the terms of its production sharing contracts, the government usually takes 65-70% of gas produced, leaving 30-35% for the partners. The government has already raised the contractor's share for Medco Energi's Block A and Italian Eni's Krueng Mane from 35% to 49%.

Platts Commodity News quoted Purnomo as saying that domestic gas prices were at most $5/MMBtu, well below international market levels, forcing the government to offer companies an incentive to supply domestic consumers.

Indonesia's gas reserves have been dwindling sharply in recent years due to natural declines, and its proven and probable gas reserves currently stand at 187.1 Tcf.

Freeport paid Indonesia $1.6 Billion in 2006

US mining giant Freeport-McMoRan Copper and Gold Inc. paid the Indonesian government $1.6 billion dollars last year from its vast mining operation in Papua province, mostly in taxes, the company said Monday (26/2/07).

It said $1.29 billion of the total comprised corporate, employee income and other taxes. Dividends accounted for $159 million and royalties for $146 million, the Associated Press reported.

Freeport Indonesia has paid $5.1 billion to the Indonesian government since 1992, according to the statement. Taxes accounted for $4.1 billion of the figure, with the remainder comprised of royalties and dividends.

The company said Freeport Indonesia had also invested $5 billion to develop company infrastructure and $500 million in social facilities. It had also generated direct employment for 9,000 people in 2006, some 27% of whom were indigenous Papuans, the statement said.

It added the company had provided 10,700 jobs indirectly last year, for example for contract workers or employees at partner firms. The statement said the firm had also purchased domestic goods and services worth $4.3 billion.

Pertamina Units to Launch IPOs

Indonesia is preparing to launch initial public offerings (IPOs) on subsidiaries of state oil firm Pertamina, with PT Elnusa likely to be first in line, Energy Minister Purnomo Yusgiantoro said on Thursday (1/3/07).

"Not Pertamina, but its subsidiary," Purnomo told Reuters when asked about plans for an IPO of the state oil and gas firm. "Now they are preparing for it."

The minister said oil products retailer Elnusa would be the first in line under the current plans, although he did not specify a time frame.

The minister ruled out any IPO for the holding firm of Pertamina given its public service obligations. 

EMP Partners with Mitsubishi, Japex

Energi Mega Persada has signed a preliminary deal to take on Mitsubishi and Japan Petroleum Exploration Company (Japex) as strategic partners in its Kangean production sharing contract offshore East Java, the publicly-listed Indonesian oil and gas company said Thursday (1/3/07).

Under a heads of agreement signed Wednesday, the two Japanese companies will subscribe to shares in EMP's subsidiary Energi Mega Pratama at a cost of $360 million, EMP said. 

Mitsubishi and Japex will assume an aggregate indirect 50% working interest in the Kangean PSC and carry a substantial portion of EMP's remaining capital expenditure obligations for Kangean's major projects, it added.

Energi Mega Pratama owns 100% of EMP Kangean Limited and 100% of EMP Exploration (Kangean), which hold 60% and 40% working interests, respectively, in the Kangean PSC.

The Kangean PSC, covering 4,508 sq km, currently produces about 65,000 Mcf/day of gas from the Pagerungan field. The gas is delivered to customers in East Java through a subsea pipeline operated by state-owned oil and gas company Pertamina.

The PSC is estimated to hold proved and probable reserves of 1.74 Tcf of gas and 1 million barrels of oil and condensate. 

MINING

Golkar Party Calls for Compromise on Bill 

The Golkar Party has called for a compromise in new mining legislation which it says would satisfy demands for tougher protection but also meet industry demands for certainty of contracts. 

Golkar proposed that a new arrangement, to be called a "mining agreement", which would basically be similar to a Contract of Work, be provided for in the draft law.

Legislator Erlangga Hartanto said that such an agreement would be given exclusively to mining projects involving a total investment of more than $250 million.

The Energy and Mineral Resources Ministry's director general of coal, minerals and geothermal energy, Simon Sembiring, responded positively to the suggestion but said any decision on whether to adopt the proposal would be up to the House special committee deliberating the bill.

Bumi Short-Lists 7 Bidders 

PT Bumi Resources, Indonesia's biggest coal exporter, said it has short-listed seven potential buyers for a 30% stake in two coal-mining units. India's Tata Power Co. and Reliance Energy Ltd. confirmed they had bid.

The would-be investors had submitted binding offers for 30% of PT Kaltim Prima Coal and PT Arutmin Indonesia by a February 28 deadline, Dileep Srivastava, senior vice president for investor relations, said in an e-mail to Bloomberg, without naming them.

Bumi, Asia's third-largest coal company by sales, in November revived a plan to sell the stakes in Arutmin and Kaltim Prima after an earlier $3.2 billion sale agreement collapsed in August. 

The Jakarta-based company hired Credit Suisse Group, Switzerland's second-largest bank, to find a buyer for the units, which supply thermal coal used to generate electricity in South and East Kalimantan.

Credit Suisse “is tabulating the bids,” Srivastava said. “It's premature to talk of the winning bidder.”