BKPM ASKS FOR SPECIAL ELECTRICITY TARIFF POLICY FOR LABOR-INTENSIVE INDUSTRIES

The investment Coordinating Board (BKPM) encouraged a special electricity rates policy for labor-intensive industries in order to improve product competiveness in the Asian region. Head of BKPM, Franky Sibarani, on Friday (March 6), said that the policy was necessary because the cost of the minimum wage, as labor-intensive industries contributed 20%-25% of production costs. He said that the results of labor-intensive industry investor forum and BKPM study show that if electricity cost can be reduced, the competitiveness of labor-intensive industries will increase.

For comparison, the electricity industries in Indonesia outside peak hours reached USD 0,060 per kWh. While, electricity tariff in Vietnam is USD 0,038. BKPM proposes special rates for labor-intensive industries outside peak hours, so it can compete with Vietnam. Franky added that is party would send letter to the relevant ministries and institutions in order to coordinate the proposal. He hopes that the government could soon issue special electricity tariff policy labor-intensive industries, to encourage more investment in labor-intensive industries. Previously, the businesses also have submitted a similar proposal.

Based on BKPM reports, foreign direct investment (FDI) that flows to Indonesia from January 1 to February 27, 2015 reached USD 2.7 billion. It consisted of USD 1.26 billion of investment in labor-intensive industries, USD 1.16 billion import substitution, USD 216 million downstreamization of agriculture (cocoa, rubber, and CPO), and USD 10 million electricity. Meanwhile, the relevant criteria to determine foreign investor level is based on the level of seriousness, he explained that BKPM has three categories, namely serious, interested, and prospective. He described that the criteria of serious, interested, and prospective. He described that criteria of serious investors is that they have met several times with the BKPM marketing officers in Indonesia and have visited the location to be used for their investment projects.

In addition, foreign investors must have a local partner as a work partner in Indonesia and have a clear business plan. At least they already know what is needed, ranging from land size, employment, production capacity, machinery imports, and the percentage of product exports. While, those included in the criteria of interested investors are those that have met with marketing officers in Jakarta, but only once and still consider the constraints for running business.

Regarding prospective investors criteria, he explained that investors who are in this category usually still in the stage of “capturing” by BKPM market-representative offices in some countries (IIPC) and the Indonesia Embassy. For 2015-2019, BKPM is targeting a total number of principial license (IP) of IDR 5,864 trillion of foreign investment to meet the target of investment to meet the target of investment realization of IDR 3,500 trillion.

On the same occasion, Franky also noted that BKPM will provide investment guarantees for the existing investors in water industry following the removal of Water Resources Act. He said that the government had agreed that companies who already have a license (including Groundwater Permit/SIPA) and already in operation, can still operate as usual until there is a new regulation. He remained the existing investors in the water-based industry not to feel anxious. The government, in this case BKPM and other related ministries, agreed to continue to support investors who have entered and made investment. New regulations to provide legal certainty to investors are being prepared. (E) 

Business News - March 11, 2015                                            

DECLINE IN OIL PRICES AFFECT THE DOWNSTREAM PETROCHEMICAL INDUSTRY

The fall in oil prices lately, which has reached USD50.60/barrel (WTI) and USD 60.60/barrel (Brent) for futures contract of April, directly affect the downstream petrochemical industry, because the raw materials purchased are in US dollars, while sale value of the final products is in Rupiah. Therefore, the government seeks to find a solution to this condition so that it does not have a major impact on the downstream petrochemical industries. Especially at this time, the rupiah was quite depressed against the US dollar, which reached IDR 13 thousand per 1 USD. This statement was made by Minister of Industry, Saleh Husin, after opening a seminar on “The Impact of Oil Price Decline on the Petrochemical Industry in 2015,” in Jakarta, on Thursday (March 5).

Meanwhile, responding to the demand of the petrochemical industry association so that he sale of raw materials up to the sale of products from up stream to downstream in converted to Rupiah, Industry Minister said that he would discuss it first with the business, how the policy will be implemented, and what benchmark/reference will be used. “This issue will be discussed, and we will ask employers (associations) for approval,” he explained.

In his speech, he said that based on its characteristics, the petrochemical industry is classified as capital-intensive, technology-intensive, and energy-intensive industry, so there is a need for a strategic step in a continues development. With a population of 250 million people and the support of natural resources as raw material for the petrochemical industry, both non-renewable and renewable, Indonesia has the potential to be a center for the development of petrochemical industry in ASEAN and Asian strategic environments. Based on data of January 2014, Indonesia has total reserves of 7,549 billion barrels of oil consisting of 3,692 billion barrels (proven) and 3.857 billion barrels (potential); Total gas is 152.89 trillion cubic feet consisting of 104.71 trillion cubic feet (proven) and 48.18 trillion feet (potential); as well as 21 billion tons of coal reserves.

Meanwhile, the potential of unexplored coal reserves is 104 billion tons. “We expect that these resources can be used optimally in the country to support industrial development of the industry, in general, and the petrochemical industry, in particular,” said Saleh.

Director General of Manufacturing Industry Basis of the Ministry of Industry, Harjanto, stated that on one hand, the petrochemical industry still faces problems, such as lack of production capacity, so that imports of petrochemical products is still high. Likewise, raw materials, especially naphtha and condensate, are still imported, while the national oil & gas industry exported naphtha and condensate. In addition, between the oil & gas and upstream chemical industry, intermediate chemical industry and downstream chemical industry have not been integrated, and mastery of research and development of polymer industry technology (product technology and production processes) are still limited.

Fiscal policy is also unfavorable, so that tax relief and tax exemption (tax holiday) for new investment or capacity addition and interest subsidies for revitalization of production machinery have not been effective.

Therefore, the policy set by government is development the petrochemical industry by cluster approach with the existence of a company that becomes champion in each cluster, which is expected to be a catalyst for petrochemical industry downstreamization value by utilizing multiple feedstock/horizontal differentiation where condensate production is 36 million barrels/year; natural gas reserves 574 TSCF; and coal reserves 21 billion tons.

The government will also seek to control the export of raw materials through Domestic Market Obligation for international commodities (such as naphtha, condensate, LPG, coal, and CPO); and promote a condusive investment and business climates, through Tax allowance (Government Regulation No. 52/2011) as well as tax holiday for certain industries, i.e. basic metal industry, oil refining industry, petrochemical upstream industry, machinery industry, renewable resources, and telecommunications equipment industry (Regulation of Minister of Finance No. 130/2011).

Chairman of the Indonesian Olefin, Aromatic and Plastic Industry Association (Inaplast), Amir Sambodo, on the occasion, recognized that there has to be an association that monitors the impact of the continued decline in crude oil prices, because some have the opinion that the low price of crude oil will lead to faster growth of petrochemical industry.

However, it has to be examined considering that price of raw materials is only a factor in the development of petrochemical industry. There are other factor that are also very important, i.e. investment climate, which included ease of investing, financial condition, legal certainty, infrastructure, and so on. Indonesia must admit that the capacity of the petrochemical industry development plan currently is far behind from neighboring countries in the ASEAN region. (E)

Business News - March 11, 2015

RUPIAH BASIC CREDIT INTEREST STUCK IN UNCERTAINTY

Only a few middle class bank did marginal adjustment of Basic Credit Interest (SBDK) of Rupiah, while other banks took the position of Wait-and-See. The condition today was still not condusive for BI to make any decision to increase or lower BI Rate from the present position of 7.50%. Pipelining of Bank’s interest including Consumptive Credit was still stuck. Rupiah was again depreciated against USD from USD 12,825 (buying) and Rp.1,925 (selling) per USD (February 27) noon to become Rp.12,975 (buy) and Rp.13,065 (sell) per USD March 5, 2015. The case of conflict between KPK and Police General Budi Gunawan was cooling off, another conflict bursted out between the Governor of Jakarta Ahok and the Provincial Parliament (DPRD). Business-people were more hesitant than over, and foreign investors who were reserved about buying Promissory notes were increasing in number. (SS)

Business News - March 11, 2015

AN ECONOMIC OVERVIEW OF THE EMERGING MARKETS

Bloomberg survey outcome recently showed that the emerging markets of Asia and Africa dominated global growth this year and was predicted to above global growth projection for the next 2 years.

Among 20 countries of high economic growth, Indonesia was in 5^th position. This survey estimated world’s economic growth was 3.2% this year against 3.3% in the past 2 years.

The growth figure were dominated by 20 countries, i.e. China, the Philippines, Kenya, India, Indonesia, Nigeria, Malaysia, Peru, Thailand, Uni Emirates, Kazakhstan, Colombia, Saudi Arabia, Taiwan, turkey, South Korea, Poland, Mexico, Ireland and Singapore. Top five countries contributed around 16% to global GDP and this year 5 countries scored growth of above 5%.

For comparison, Britain’s and America’s economy, which when combined constituted around a quarter of global economic growth, were predicted to grow by 3.1% and 2.6 respectively this year. Euro zone would probably only expand by around 1.2%.

According to survey, the result of which was released last Tuesday (26/2), china was still G-20 member with fastest growth although not as fast a few years ago. China’s economy grew by 7.4% in 2014 last and was predicted to slow down to 7% in 2015.

US economic growth in 2015 was around 3% even in the USD soared up to highest level in one decade if the Fed increased interest for the first time since December 2008. As known the Fed’s interest had been close to zero percent since December 2008.

Unfortunately US economy grew slower than expected in quarter 4 2014, being suppressed by measly growth in reserves and increasing import.

Revision of GDP expansion was slightly better than expectation of 2.1% after strengthening by 5.0% in quarter 3.

The latest economic data had it that increase of US bank interest would drain fund of the emerging market, but that’s not what happened. Unexpected stimulus in Europe and Japan, triggered investors to invest State’s Promissory Notes in India, Indonesia and South Korea.

Capital inflow also axed average return of state’s bonds of the emerging markets by 21 basic points to become 4.20%, lower than the average return in general at 4.20%. although fallen world’s oil price had helped budgeting process in developing countries, political and corporate scandal in Brazil and Argentine had faded market trust in Latin America, while crisis in Ukraina had triggered capital exodus from the Middle East.

Unlike the emerging markets of Europe, Africa and Latin America, the emerging market of Asia was relatively free of political uncertainty. Although increase of US bank rate influenced the emerging markets, analysts still see the good performance of Asian bonds.

Index of Bloomberg showed Asian bonds in local currencies yielded 2.3% this year, led by Indonesia at 8.4% and China 2.6%, bonds of Latin America lost minus 0.4% while in Europe, the Middle east and Africa dropped by 0.8%

According to data of EPFR Global, by February 20 last Asian bonds had collected fund of USD 1.1 billion this year, against capital outflow worth USD 654 million the same period last year. South America collected fund of USD 44 million while Europe, the Middle East and Africa absorbed USD 48 million.

Contract at the Security Exchange indicated chances were 59.5% that the Fed would increase interest before end of October, higher than last January at 46.5%, impact of the Fed and end of the tightening cycle had diminished at least in the sort run.

Asia was some sort of safe haven among developing countries. However as a whole the emerging market was not doing well. In South America, cases of NPL would increase as many bonds were energy related or linked to access of corruption.

The economic prospect itself was rated as still good. Moreover BI rated that structural reformation was the key solution for Indonesia to jack up higher economic growth with financial stability being under control. This was related to BI’s main mission to managed Rupiah value and control inflation.

Only trouble was that Indonesia’s economy was still highly dependent on import so high economic growth might worsen deficit in current transaction. The need for capital goods propelling economy was still fulfilled by import, while the structural reformation itself must encompass efficiency through betterment of the logistics system, reformation of the fiscal (as shown by reduction of subsidy), human resources development, and reformation of the bureaucracy.

The BI policy mix was based on overall consideration. This included the monetary indicator, risk potential, macro prospect and economic growth, balance of payment and the financial condition.

BI saw that Indonesia’s economy was still reliant on foreign investment (PMA). Under such circumstances it became imperative to maintain economic stability to create a condusive investment climate for long term investors.

It would be advisable to manage national economy with prudence, for example by managing deficit in current transaction. Foreign investors must be attracted with appetizing interest rate. All in all Indonesia’s fundamental economy was still appealing to foreign investors.

One of the monetary indicators noteworthy was forex reserves. The forex reserves managed by the Central Bank itself was posted at USD 114.25 billion per January 30, 2015; enough for financing import of around 6.5 months or longer than the standard 3 months. Indonesia as one of the attractive investment destination in Asia’s emerging markets must be able to maintain her comparative advantage to attract more investors. (SS)

Business News - March 11, 2015