HOW THE COUNTRY'S MANUFACTURING INDUSTRY TO SURVIVE THE GLOBAL CRISIS?

INDONESIAN COMMERCIAL NEWSLETTER

January 2009

FOCUS

HOW THE COUNTRY'S MANUFACTURING INDUSTRY TO SURVIVE THE GLOBAL CRISIS?

Domestic market the last bastion

No one could give reason that in order to go through the devastating global financial crisis; the country's manufacturing industry should be able to effectively utilize the domestic market potential. Indonesia is not the same as Malaysia, and Singapore which are heavily dependent on export market. Indonesia is more oriented to domestic market and the domestic market is highly potential. The contribution of export to the country's Gross Domestic Product is not as big as the consumption sector.

Ever since the monetary crisis that pushed the country to the brink of bankruptcy in 1998, the consumption sector especially household or private consumption has been the main driving force for the country's economic growth. The contribution of the government consumption has been relatively weak.

It is so with the investment sector. For quite a long time Indonesia no longer depends on foreign investment. Foreign investment has little contribution to the country's economic growth in the past decade. Foreign investors see Indonesia not safe for their investment. The country has been less competitive facing other countries in this region like Thailand, Malaysia, Singapore and Vietnam. The condition began to improve in 2004, when foreign investors began to show interest in the country. However, until now many foreign investors still hesitate to venture in the country. It would take more time to regain their full confidence. Indonesia, therefore, still has to rely more on domestic investment.

When the global financial crisis broke into the open late last year, export oriented economies scrambled to find markets other than crisis hit United States, European Union and Japan to dispose of their export commodities. Malaysia and Singapore, which have small domestic market, are in problem where to find market for their goods.

Indonesia could still relay on its potential domestic market. The problem is the weak purchasing power and the high interest rate. A cut in interest rate would strengthen the buying power of the people. Sales of many products depend much in the availability of cheap consumer credit. Most owners in the country buy their of cars and motorcycles with credits.

The new economic giant China is now eyeing developing economies to dispose of its large export commodities. Indonesia is one of its main targets. In fact, Indonesia is a major target for exporters not only from China but also from the neighboring countries.

The condition brings about a new threat to the country's manufacturing industry. The country's manufactured products will face strong competition from imported products many of which sold at cheaper prices.

High credit interest rates still hamper the revival of the country's cash strapped manufacturing sector. The country's manufacturing industry, therefore, remains too weak to fully exploit the potentials of the domestic market.

Manufacturing Industry Weakening

Some of the country's export oriented industries have also been in big problem to dispose of their products. According to the industry ministry, there were nines export oriented industries suffering a setback in performance in 2008. Some of them have recorded a contraction such as textile and leather and footwear industries that contracted by 2.5% , industries producing non metal mineral products shrank by 1.5% and those producing timber and forest products by 0.1% . Other industries still maintained growth though at much lower rates.

Ernovian G. Ismy, the secretary general of the Indonesian Textile Association (API) was quoted as saying that the country's yarn production fell by 35% to 140,833.55 tons in January, 2009 from 216,667 tons in the same month in 2008.

The general chairman of the Indonesian Association of Cement Producers (ASI) Urip Timuryono said cement market shrank in January 2009 compared with January in 2008 when sales still reached 3.1 million tons. This reflected the condition in the property and construction sectors. Urip said, the property sector has been weakened by the increase in the credit interest rates that reached 17%-19%.

Securing Domestic Industry

In order to safe the domestic industry, the government has provided various incentives . The government has decided that 31 industrial sectors will have tax incentive in the forms of exemption from value added tax and import duties as part of fiscal stimulus.

The fiscal stimulus for the 31 sectors will reach a total value of Rp12.5 trillion. VAT exemption valued at Rp9.02 trillion will be given to 17 sectors . Import duty exemption valued at Rp2.4 trillion will be given to 14 sectors.

The tax and import duty exemptions will be provided for industrial basic materials. The goods entitled to the VAT exemption incentive are :

1. Steel basic materials

2. EPC equipment for the construction of PLN's projects of 10,000 MW power plants

3. Ice making mini machines for fishery

4. Cold storage machines for fishery

5. Clothe for finished wear industry

6. Leather, soles, rubber components for footwear industry.

7. Ship basic materials and components

8. Basic materials for car body building industry

9. Silver basic material for handicraft industry

10. Components and basic materials for rail cars

11. Basic materials and equipment for film production

12. Crum rubber

13. Rattan for furniture industry

14. Fish/shrimp feed

15. Non subsidized bio-fuel

16. Cooking oil

17. Oil and gas and geothermal .

Those entitled to import duty exemption are :

1. Ballpoints

2. Basic materials and components for heavy equipment

3. Basic materials and components to build small capacity coal fired power plants

4. Milk basic materials (skim milk powder and full cream)

5. Auxiliary material - methyl tin mercaptide

6. Basic materials and components for automotive industry

7. Electronic components

8. Telematic (fiber optic and components of telecommunication)

9. Basic materials and components of ships

10. Auxiliary material for sorbitol industry

11. Basic materials and equipment for film production

12. Electricity

13. Health equipment

14. Aircraft .

The government also is seeking to increase the purchasing power of the people to increase consumption of domestic products . The central bank, therefore, is expected to continue to lower interest rate and keep inflation low.

The government has three times slashed the prices of subsidized oil fuels (BBM) that the price of premium gasoline has returned the normal level in July , 2008. The slashing the fuel price should help bolstered the purchasing power of the people.

Meanwhile, the prices of other essential goods like cooking oil and rice are relatively stable or have even declined from the peak level in 2008 when the rice price hit the level of US$1,000 per tons in the world market. The prices of cooking oil have also declined with the crude palm oil price fall in the world market.

Deflations have been recorded in two successive months - December in 2008 and January in 2009 -- to follow the sharp price falls. The country's inflation is forecast to be kept relatively low at 6% this year. This will help strengthen the purchasing power of the people amid the waves of job cut

Lower inflation has encouraged Bank Indonesia to cut its benchmark interest rate (BI Rate) . In two successive months - January and February, the central bank cut the BI Rate from 9.25% to 8.25% .

The government also has given fiscal incentive such as income tax exemption for companies operating in a number of industrial sectors hopping to increase the income of working class people.

Car, motorcycle and electronic industries will be boosted by the availability of sources of cheap funds. Most Indonesian consumers buy cars and motorcycles as well as electronic goods on credits.