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GDP (2001): $144.8 billion.
Annual growth rate (2001): 3.3%.
Per capita income (2001): $683.
Natural resources (13.6% of GDP): Oil and gas, bauxite, silver, tin, copper, gold, coal.
Agriculture (16.4% of GDP): Products--timber, rubber, rice, palm oil, coffee. Land--17% cultivated.
Manufacturing (26.1% of GDP): Garments, footwear, electronic goods, furniture, paper products.
Trade: Exports (2001)--$56.3 billion including oil, natural gas, plywood, manufactured goods. Major markets--Japan, Singapore, Taiwan, Korea, EU, and U.S. Imports (2001)--$31.0 billion, including food, chemicals, capital goods, consumer goods. Major suppliers--Japan, U.S., Thailand.
Economy of Indonesia
Indonesia has a market-based economy in which the government plays a significant role. It owns more than 164 state-owned enterprises and administers prices on several basic goods, including fuel, rice, and electricity. In the aftermath of the 1997-98 financial crisis, the government took custody of significant portion of private sector assets through acquisition of non-performing bank loans and corporate assets through the debt restructuring process.
In the mid-1980s, the government began eliminating regulatory obstacles to economic activity. The steps were aimed primarily at the external and financial sectors and were designed to stimulate employment and growth in the non-oil export sector. Annual real GDP growth averaged nearly 7% from 1987-97, and most analysts recognized Indonesia as a newly industrializing economy and emerging major market. The Asian financial crisis of 1997 altered Indonesia's political and economic landscape. Since 1997, Indonesia has had three presidents, and as of mid-2002, its economy is only just recovering to pre-1997 levels. Seven percent GDP growth is the level most economists consider necessary just to absorb new job seekers, but the Indonesian Government estimates growth in 2002 of 4% and in 2003 of less than 5%. The number of unemployed and underemployed (working less than 15 hrs/week) is currently estimated at 40 million.
President Megawati Soekarnoputri has made important strides in her first year in reducing political instability, strengthening Indonesia's relationship with the International Monetary Fund (IMF), and reinvigorating the country's economic reform program. The government has completed four quarterly IMF reviews since September 2001. However, a sharp rise in anti-IMF sentiment among Jakarta politicians and commentators in mid-2002 has called into question the degree of political support for further reforms. Megawati's administration spawned a sustained increase in market sentiment during the first half of 2002, with both the rupiah and Jakarta Stock Exchange performing strongly. Consumer confidence and exports have begun to rise from their very low levels of late 2001.
The rupiah has stabilized significantly from trading at the Rp 11,440/USD level in July 2001 when President Megawati took office. After an initial surge following Megawati's election, the rupiah weakened again in the last half of 2001. Since then it has strengthened slowly to the Rp 8,800/USD level, an increase of 23%. Previously, the value of the Rupiah was very volatile ranging from Rp 2,500/USD prior to the Asian Financial Crisis to a low of Rp 17,000/USD after President Soeharto resigned in June 1998. Although the stability of the rupiah has returned, the approach of elections in 2004 and slower economic growth combined with high levels of debt have made exchange rate risk a major concern of investors.
The Megawati administration has made much less progress in improving Indonesia's troubled investment climate, and several adverse court rulings against foreign companies brought investment issues to the forefront of government policymaking in 2002. Besides the lack of legal certainty, existing and potential investors cite a number of concerns with respect to Indonesia's investment climate, including security, confusion over regional autonomy policies and fiscal decentralization, uneven implementation of economic reform commitments, and tax and labor issues.
Indonesia's public sector external debt rose from $54.2 billion in March 1998 to about $76 billion by the end of 2001. Private sector external debt stood at approximately $60 billion. The large amount of non-performing corporate debt, estimated in late 2000 at U.S. $65 billion, is a major factor limiting capital markets growth in Indonesia. Although debtors and creditors have reached agreement on a substantial number of restructuring terms sheets through IBRA and the Jakarta Initiative Task Force, most of these agreements have yet to reach legal closing. As a result, few of Indonesia's largest corporations are creditworthy.
Oil and Minerals Sector
Indonesia, the only Asian member of the Organization of Petroleum Exporting Countries (OPEC), ranks 17th among world oil producers, with about 1.9% of world production. Crude and condensate output averaged 1.4 million barrels per day (b/d) in 2001. In the 2001 calendar year the oil and gas sector, including refining, contributed approximately 13.7% to GDP and provided 35% to domestic revenues. The sector's share of export earnings was 22.4% in 2001, a greater percentage than recent years due to high world oil prices. U.S. companies have invested heavily in the petroleum sector. With domestic demand for petroleum fuels expanding, Indonesia will become a net importer of oil by the next decade unless new reserves are found. In 2001, Indonesian imports of crude oil and petroleum products totaled $5.4 billion while Indonesian exports of crude oil and oil products and LNG totaled $12.7 billion.
The state owns all oil and mineral rights. Foreign firms participate through production sharing and work contracts. The Indonesian Government passed a new petroleum law in October 2001 that deregulates the upstream and downstream sectors in 2 years. The law removes Pertamina's monopoly over downstream oil distribution and marketing of fuel products and makes no procedural distinction between foreign and domestic oil and gas companies. Pertamina's responsibility to manage Production Sharing Contracts (PSCs), which authorize investors to produce oil and gas, will shift to the central government. Oil and gas contractors are required to finance all exploration, production, and development costs in their contract areas; they are entitled to recover operating, exploration, and development costs out of the oil and gas produced.
Although minerals production traditionally centered on bauxite, silver, and tin production, Indonesia is expanding its copper, nickel, gold, and coal output for export markets. In mid-1993, the Department of Mines and Energy reopened the coal sector to foreign investment, with the result that the leading Indonesian coal producer now is a joint venture between U.K. firms BP and Rio Tinto. Total coal production reached 92.5 million metric tons in 2001, including exports of 66.5 million tons. The Indonesian Government hopes to surpass 120 million metric tons of coal production in 2005. Two U.S. firms operate three copper/gold mines in Indonesia, with a Canadian and U.K. firm holding significant other investments in nickel and gold, respectively. In 2001, the value of Indonesian mining exports generated $3.6 billion, with receipts from copper and coal accounting for 89.7% of the total.
Since the late 1980s, Indonesia has made significant changes to its regulatory framework to encourage economic growth. This growth was financed largely from private investment, both foreign and domestic. U.S. investors dominated the oil and gas sector and undertook some of Indonesia's largest mining projects. In addition, the presence of U.S. banks, manufacturers, and service providers expanded, especially after the industrial and financial sector reforms of the 1980s. Other major foreign investors included Japan, the United Kingdom, Singapore, the Netherlands, Hong Kong, Taiwan, and South Korea.
Despite improvements in political stability, incomplete reform in other sectors has slowed foreign investment growth. New foreign investment approvals for the first 5 months of 2002 fell by 58% to U.S.$1.67 billion from U.S.$3.97 billion over the same period in 2001. From a record high of U.S. $33.8 billion in 1997, approvals fell 73% to roughly $9 billion in 2001. (Note: The data does not include investments in oil and gas, finance, banking, non-bank finance, insurance, and leasing. Government approval reports should be treated cautiously, and used as no more than an indicator of possible trends because they represent applications to invest and not actual projects or money.) The recent commercial court Manulife bankruptcy ruling brought to light serious weaknesses in the judicial system. Foreign businessmen have expressed reluctance to increase investments prior to the establishment of a better functioning legal and judicial system, greater adherence to transparent and competitive processes, and improvements in security. With the passage of a new copyright law in July 2002, Indonesia's intellectual property rights regime was strengthened; however, the lack of effective enforcement remains a major concern. Investors in the manufacturing sector also are concerned by rapidly rising wages, which threaten Indonesia's competitiveness in labor-intensive industries.