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Economy

Indonesia’s economy continues to recover from the impact of August 2005 rupiah “mini-crisis,” with growth in gross domestic product (GDP) reaching 5.5% year-on-year (YoY) in the third quarter.
· Strong external demand for Indonesian commodities and increased household consumption supported the more robust growth rate.
· In contrast to the previous quarter, however, growth in government expenditures slowed significantly during the July to September period, due in part to decentralization which, according to many analysts, has disrupted the dispersal of government funds.
· While the investment outlook in Indonesia has improved somewhat, fixed capital investment remained stalled in the third quarter, contracting over the same period last year.
·Analysts expect domestic demand to continue to accelerate through the end of 2006 and through the first half of 2007 supporting more robust GDP growth.
· Indonesia’s overall macroeconomic outlook continues to improve with lower inflation expectations, rising foreign exchange reserves, and a less volatile exchange rate.
· A significant contraction in global demand, a sudden change in foreign short-term investor sentiment, delays in pro-investment reforms, and the failure to reduce unemployment levels are the key risks to economic growth and stability over the short-to-medium term.

-Indonesia’s 2005 exports increased 19.5 percent year-on-year (YoY) to USD 85.6 billion from USD 71.6 billion in 2004, exceeding expectations. Electrical tools, fats and palm oils, and machinery/mechanical equipments were leading export sectors.
-The Minister of Finance announced on January 26 that the Government of Indonesia (GOI) has completed the second phase of a comprehensive Tariff Harmonization Program covering more than 9,200 tariff lines. New tariff rates under the harmonization program came into effect February 1, 2006.
-A number of local banks agreed on January 24 to provide financial support to some Indonesian textile producers for working capital and machinery upgrades.
-New domestic car sales reached a record 534,000 units in 2005, a 10.5 percent increase from 2004.
-Motorcycle sales in 2005 demonstrated even more impressive growth, rising to 5.1 million units, a 31.2 percent increase YoY.
-The Ministry of Industry said on January 18 that it would make development of a domestic automotive industry a priority.
-The Indonesian Footwear Manufacturers Association announced on January 19 that Indonesian footwear exports increased 20 percent from USD 1.5 billion in 2004 to USD 1.8 billion in 2005.

Export Growth Continues
The Central Bureau of Statistics (BPS) announced on February 1 that Indonesia's exports reached USD 85.6 billion in 2005, a YoY increase of 19.5 percent. Non-oil and gas exports rose to USD 66.3 billion, a YoY increase of 18.65 percent. Imports in 2005 grew to USD 57.6 billion, a 23.7 percent increase YoY. Strong export growth caused Indonesia's trade surplus to increase 11.8 percent in 2006 to USD 28.0 billion.

Industrial exports, which account for 64.4 percent of total exports, expanded 13.3 percent YoY in 2005 to USD 55.1 billion. Electrical tools, fats and palm oils, and machinery/mechanical equipments were Indonesia's top three non-oil and gas export earners for the period, accounting for USD 7.4, USD 4.8 and USD 4.6 billion respectively. Resource oriented exports such as crude oil, natural gas, and oil production, demonstrated the strongest growth, reflecting high global commodity prices and increased demand from China and other regional partners, comprising 30.5, 18.5 and 16.1 percent of oil and gas exports respectively.

In December alone, BPS recorded global crude oil prices for its exports earning calculation at USD 54.6 per barrel, a 2.3 percent increase from USD 53.4 in November. Strong growth in capital goods imports (27 percent increase YoY) and a respectable increase in industrial goods exports are likely signs of an improving business climate in Indonesia’s manufacturing sector. Total imports surged with the rise in world oil prices and Indonesia’s status as a net oil importer for much of 2005. Japan edged out the United States as Indonesia’s largest non-oil and gas export destination in 2005, with Singapore taking third place.