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Economy

Indonesia seeks to lure manufacturers with broader tax breaks

JAKARTA -- Indonesia will offer more incentives to attract manufacturing, materials processing and other downstream industries, Finance Minister Bambang Brodjonegoro told The Nikkei on Wednesday.

     The government is expanding and extending corporate tax incentives. The measures now cover five industries, including telecommunications and base metals, such as nickel smelting. Four more will be added, with plant investment in special economic zones, shipbuilding, and agricultural processing to be included. The maximum length of the breaks will double to 20 years. The finance minister will have the authority to approve or reject applications.

     Plants that build processing equipment will be covered, while automobiles and apparel will be excluded, Brodjonegoro explained.

     The tax breaks were first introduced in 2011. But only four applications have been approved, because of the high minimum required investment of 1 trillion rupiah ($71.4 million) and the limited number of eligible industries. The new package will cut the minimum to 500 billion rupiah for telecommunications. Brodjonegoro said he intends to speed up the process and approve more requests now that decision-making authority is concentrated in his hands.

     Indonesia is scrambling to foster its manufacturing and processing sectors because the nation's soft currency has done little to boost its competitiveness as an exporter. Dim prospects for improvement of the current-account deficit have spurred further rupiah-selling. The currency's weakness has pushed up import prices, narrowing profit margins for Japanese manufacturers in the country.

     Although Japan is among the largest investors in Indonesia's manufacturing sector, including autos, Brodjonegoro expressed some frustration, saying margins are being squeezed "because they've kept importing steel and other [goods] from Japan."

     "They should step up purchases of local products," he said, citing expanded cooperation with local state-run steelmaker Krakatau Steel as a possible example.

     The rupiah has softened nearly 50% from 2012 levels. Depreciation has accelerated of late amid emerging-market turmoil stemming from China's effective devaluation of the yuan.

     "The biggest concern is not the devaluation of the yuan but the weakening of the Chinese [economy]," Brodjonegoro said. He also hinted that the Indonesian government could lower the assumed exchange rate for the draft budget ending December 2016. The assumed rate stands at 13,400 rupiah to the dollar, compared with the current rate of around 14,000.

     China has been Indonesia's biggest trade partner since 2013, when it overtook Japan. "We would encourage direct transactions with the yuan and rupiah," Brodjonegoro said. He also commented that Indonesia "might consider issuing a yuan sovereign bond" next year.

     Indonesia's real gross domestic product grew 4.67% on the year in the April-June quarter -- the slowest seen with the current calculation method using 2010 as a base year. Many predict growth below 6% for 2015 as a whole. The country's growth target of 5% to 5.2% "can still be achieved," Brodjonegoro argued, saying Jakarta will ramp up implementation of its infrastructure budget, of which it has spent only 20%.

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