INDONESIA: GRAPPLING WITH THE INTERNATIONAL ECONOMIC SLOWDOWN

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84S00554R000200030001-3
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 16
• Document Creation Date: December 21, 2016
• Document Release Date: August 26, 2008
• Sequence Number: 1
• Publication Date: November 1, 1982
• Content Type: REPORT

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STAT
State Dept. review completed
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Directorate of Secret
Intelligence
A 07
Indonesia:
Grappling With the
International Economic Slowdown
State Dept. review completed
Secret
EA 82-10126
November 1982
COPY 2 9 7
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Directorate of Secret
Intelligence
Hnde I0 ,o
GIrappling
ffnt ll 1 IlO
0
con? H S
wdown
This assessment was prepared b
of the Office of East Asian Analysis. Comments and
queries are welcome and may be addressed to the
Chief, Southeast Asia Division, OEA,
Intelligence Council.
25X1
25X1
Secret
EA 82-10126
November 1982
itllit the
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Secret
Key Judgments
Information available as of
28 October 1982 was used
in this report.
Indonesia:
Grappling With the
International Economic Slowdown
The abrupt decline in Indonesia's export earnings that began with the
world oil glut and the downturn in commodity markets in 1981 forced
Jakarta to adopt fiscal belt-tightening measures in the midst of parliamen-
tary and presidential election campaigns. Although the government has
been willing to cut back on consumer subsidies, government wage in-
creases, and other current outlays, President Soeharto and his economic
advisers have been reluctant to slow import growth because such a move
would threaten the country's ambitious industrialization program and
weaken employment prospects for the rapidly growing labor force. Con-
tinuing softness in export markets, however, is forcing the Soeharto
government to reevaluate its development strategy and to consider the need
for more stringent financial measures.
Indonesia will be able to cushion the export slump temporarily by drawing
down reserves and increased foreign borrowing. We believe Jakarta will be
able to obtain sufficient foreign financing at favorable terms to cover
current account deficits of $7-8 billion annually in 1982 and 1983 despite
the current turbulence in international financial markets. Bankers look
favorably on Jakarta's conservative approach to foreign debt, its willing-
ness to take austerity measures, and the country's long-term economic
prospects. Furthermore, we believe that the government will opt to slow
import growth further if necessary to avert a short-term financial crisis,
relying on the armed forces to suppress any popular reaction to new
austerity measures.
Jakarta's financial stringency in the next few years probably will lead to
disagreement with Washington on a number of issues, such as US policy on
export commodities of importance to Indonesia. But in our judgment, such
frictions will not change the basic mutually beneficial relationship. US aid
and investment will remain crucially important to Indonesia. US technol-
ogy and management expertise will continue to be needed in important
sectors of the economy, particularly the oil and gas industry. If Indonesia's
external accounts do not improve, however, we expect Jakarta to be more
assertive in seeking to boost its exports or finding ways to increase its share
of multinational firms' earnings.
Secret
EA 82-10126
November 1982
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INDIAN
OCEAN
Boundary representation is
not necessarily authoritative.
THAILAND
K1PUC
Gulf
of
Thailand
Pekanbarun&
O
Sumatra
South
China
Sea_
Palangkaraya
Mindoro
Kupang
Philippine
Sea
PALAU
ISLANDS) Trust Territory of the
Pacific Islands (U.S.)
Indonesia
International boundary
* National capital
* Province-level capital
0 200 400 Kilometers
0 200 400 Miles
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Indonesia:
Grappling With the
International Economic Slowdown
A Financial Crunch ?
The halt in export growth in 1981 ended Indonesia's
export boom of 1979-80 and is bringing on financial
strains much sooner than Jakarta had previously
expected. Although Indonesia managed to register
real growth of 7.6 percent in 1981, this performance
was overshadowed by the deterioration in its external
25X1 accounts.
Developments in 1981-82
Indonesia's current account fell from a $5 billion
surplus in 1980 to roughly zero in 1981. Official
statistics showed exports stagnating at $22 billion
while imports continued to grow rapidly to reach
nearly $17 billion and the net deficit on services
approached $5 billion. Oil earnings rose only 13
percent as OPEC price increases leveled off, while
commodity exports (excluding oil and liquefied natu-
ral gas) plummeted 30 percent as weak markets
depressed sales of wood, rubber, tin, coffee, and other
commodities. Export declines of several commodities,
such as wood and palm oil, were partly the result of
deliberate government policies aimed at satisfying
domestic needs, but a reversal of these policies proba-
bly would not have changed the results very much.
Indonesia's export performance has eroded further
this year. Oil output, which surpassed 1.6 million
barrels per day last year, fell below 1.5 million b/d in
the first quarter of 1982 as foreign demand for
Indonesian crude softened. In the second quarter,
Indonesia's production ceiling was set at 1.3 million
b/d in accord with the OPEC decision to allocate
production among its members. Output fell below
even that level in some months and Jakarta's hoped-
for third quarter recovery in foreign demand had not
materialized by October. Indeed, press reports indi-
cated that Jakarta was being increasingly pressed by
the Japanese, Indonesia's largest customer, to cut
prices just to avoid further reductions in export
volumes. Although the reports indicated Jakarta
planned to cut prices, in August President Soeharto
refused to do so. According to State Department
reporting, Judo Sumbono, president of Pertamina,
Indonesia's state oil company, was still trying to
convince Soeharto of the need for a modest price cut
for the Japanese during Soeharto's visit to the United
States in early October-with only limited success. In
early November, Jakarta announced modest price 25X1
cuts which were not enough to
bring the price of Indonesian crude into line with
competing crudes, but were a move in the right
direction. 25X1
Nonoil exports are faring as badly. Sales for the first
five months of 1982 were more than 25 percent below
the previous year's level and showed little sign of
recovery by autumn. The two most important com-
modities, wood and rubber, depend on recovery in the
depressed housing and auto industries in the United
States, Japan, and Western Europe. The International
Coffee Organization's 34-percent reduction in Indo-
nesia's quota has dimmed prospects for coffee earn-
ings. The tin market remains in disarray, with world
supplies continuing to outstrip demand.
25X1
For 1982 and 1983, we project current account
deficits averaging $7-8 billion a year even if Jakarta
slows import growth from the 35 percent annual pace
of the past two years to 15 percent. We believe
Jakarta is financing the 1982 deficit through a combi-
nation of drawing down reserves and borrowing
abroad; indeed, Jakarta has drawn down its official
reserves by more than $3 billion from the $7.4 billion
peak of October 1981. Bank Indonesia Governor
Rachmat Saleh told reporters in early November that
official reserves had fallen to $4.3 billion by the end of
October 1982. Continuation of this rate of decline
would quickly run them down to levels we believe
Jakarta would find unacceptable and threaten to
damage the country's international creditworthiness.
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Figure 1
Indonesia: Exports (f.o.b.)
Billion US $
25
Total
-Nonoil
\a LNG
Figure 2
Indonesia: Official Foreign
Exchange Reserves'
I I I I I I I I I I f
0 1971 75 80 82a
0 1975 76
a End of period.
largest aid donor and leader of the country's interna-
tional aid consortium, the Intergovernmental Group
on Indonesia (IGGI), exerts strong influence on Jakar-
ta's strategy through its evaluations of policy options
and its advocacy of policies the Bank staff deems
Reevaluating Development Strategy
The sharp reversal in Indonesia's export performance
is forcing the government to review its policy options.
The outcome will be determined by President Soe-
harto, but we believe his technocrat economic advisers
and the World Bank will strongly influence his deci-
sion. Soeharto has based his "New Order" govern-
ment on the premise that economic development
would provide the basis for political stability. The
technocrats, a group of mostly US-trained economists,
are the architects of the policies followed by Soeharto
since he came to power. The World Bank, Indonesia's
appropriate for Indonesia.
The Technocrats' Position. Leading technocrat
Widjojo Nitisastro, Coordinating Minister for Eco-
nomics, Finance, and Industry, has long advocated
policies designed to achieve rice self-sufficiency,
transform Indonesia from an agricultural to an indus-
trial economy, and create jobs for the rapidly growing
labor force. According to US Embassy and press
reporting, Widjojo was the driving force behind the
November 1978 devaluation of the rupiah aimed at
reducing the country's overwhelming dependence on
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Secret
Table I
Indonesia: Current Account Balance
Nonoil, including
LNG
2.2
1.8
2.5
3.6
Net services and private trans-
fers
-1.1
-1.6
-2.2
-2.5
1978
1979
1980
1981
19828
19838
1.7
5.5
8.9
4.8
-1.8
-1.9
10.1
14.8
21.6
21.7
17.4
19.9
oil exports. US Embassy officials reported that the
move met with strong disapproval from Soeharto's top
military advisers because of its inflationary impact
and potential threat to domestic tranquillity. Further
disputes were averted, however, when the OPEC oil
price boom-while it made Indonesia even more
dependent on oil revenues-eased the financial pres-
sure on the Soeharto government to enact followup
measures to diversify the economy away from oilI
The oil boom also encouraged the technocrats to press
ahead with an ambitious industrialization program
even while the government was increasing spending on
consumer welfare, rural development, and military
modernization. In 1981-82 alone, the government
signed contracts for projects valued at $9.5 billion,
bringing the value of industrial plants currently under
way or in advanced planning stages to more than $15
billion
The current phase of the industrialization strategy
emphasizes resource-based heavy industry which pro-
vides a competitive edge that we believe could enable
Indonesia to expand exports or reduce imports of
industrial goods. Liquefied natural gas (LNG) plants
in North Sumatra and East Kalimantan have made
Indonesia the world's largest LNG exporter and work
is already under way to double capacity at both plants
by the mid-1980s. Expansion of three petroleum
refineries will double the country's refining capacity
to more than 800,000 b/d and eliminate the need to
ship crude oil to Singapore for processing into refined
products for Indonesia's domestic market. The petro-
chemical and fertilizer plants under construction in
Sumatra and Kalimantan will use Indonesia's abun-
dant natural gas or naphtha produced by the oil
refineries as feedstock and supply their output both to
domestic and export markets. In the metals industries,
we believe the Krakatau Steel Mill and the Asahan
Aluminum Plant will act as magnets for private
investment in downstream machinery and metalwork-
ing industries. 25X1
Based on World Bank projections of Indonesia's
export prospects, we believe the technocrats had
counted on several more years of payments surpluses
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Beyond the current financial strains, Jakarta must
deal with two intractable problems as the decade
progresses. One is the need to create jobs for a rapidly
growing labor force; the other is the near certainty of
declining crude oil exports.
Nearly half of Indonesia's population of 158 million
is under age 16. We estimate labor force growth will
approach 2 million annually in the 1980s compared
with about 1.4 million a year in the 1970s. Indone-
sia's labor force of about 60 million currently shares
less than 40 million full-time job equivalents. Even
under the best of circumstances, we believe the
economy would be unable to provide full-time jobs
for more than about two-thirds of the new entrants to
the labor force during the next few years. In the
longer term the government must devise a strategy to
create enough jobs for the growing labor force or face
growing domestic unrest.
Most of Indonesia's crude oil resources are found in
small fields that are quickly depleted, requiring a
to help finance the development program before an
expected long-term decline in oil exports would result
in a financial gap. By then, the new industrial facili-
ties would help to reduce import requirements or
supplement traditional exports. With foreign aid and
borrowing to cover the payments gap, the government
could then concentrate on more labor-intensive invest-
ments in such industries as electronics, textiles, con-
sumer goods, and other light manufactures.
Soeharto's Perspective. We believe President Soe-
harto will be loath to slow the development program.
He is proud of Indonesia's economic achievements
under his leadership and has permitted his political
supporters to conduct a publicity campaign during the
past year to designate him the "Father of Develop-
ment." His restoration of the economy from the
large-scale exploration effort just to maintain output
levels. The exploration boom under way since 1978
has succeeded in reversing the decline in output from
the 1977 peak and restored output to 1.6 million b/d
in 1981 for thefirst time since 1978. Although output
could temporarily exceed 1.6 million b/d, we believe
maximum sustainable production will remain at 1.6
million b/d. In contrast to the probable stagnation in
production, domestic consumption, which has been
rising some 12 percent annually in recent years,
almost certainly will continue to erode the exportable
surplus. Reduction of consumer subsidies, conserva-
tion measures, and shifts to alternate energy sources
such as coal, gas, or geothermal energy probably will
not slow consumption growth much below 10 percent
annually before the late 1980s. As a result, the
volume of crude oil available for export could fall
from 1.1 million b/d in 1981 to 600,000 b/d by 1990,
thus sharply reducing the financial resources avail-
able to the government to fund investment projects.
chaotic conditions of the Sukarno years-bolstered by
oil earnings-led Indonesia to attain growth rates
averaging over 7 percent annually in the 1970sF-----] 25X1
While Soeharto has opened the country to foreign
investors, he has not hesitated to impose stringent
conditions on them to expand employment opportuni-
ties for native Indonesians. He has issued presidential 25X1
directives limiting the employment of expatriate em-
ployees and requiring foreign firms to use Indonesian
subcontractors even at the cost of discouraging some
investments and increasing costs of others.
Soeharto, in our view, probably considers a slowdown
in the development program a last resort, but un-
doubtedly is still acutely aware of the difficulties
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Table 2
Selected Industrial Projects
Krakatau Steel Mill expansion
2,700
Asahan aluminum plant expansion
2,000
Arun LNG plant expansion
850
Badak LNG plant expansion
995
Dumai Refinery hydrocracker
1,450
Balikpapan Refinery expansion
1,480
Cilacap Refinery expansion
1,160
Aceh olefins complex
2,850
Aceh urea plant
400
Badak urea and ammonia plant
210
Leces newsprint plant
210
Six other pulp and paper plants
1,100
Suralaya electric powerplant
800
Musi Oil Refinery
1,020
Indonesia faced in restoring its international cre-
ditworthiness after the Pertamina financial crisis in
1975. Should he opt for further austerity measures,
we believe he can rely on the armed forces to suppress
any public outbursts or overt opposition to his policies.
The World Bank View. Although less influential than
it was during the early years of Soeharto's rule, the
World Bank remains the leader of Indonesia's inter-
national aid consortium. The Bank publishes assess-
ments of Indonesia's economic performance, often
focusing on specific development issues, that strongly
influence the outcome of the annual aid meetings. The
Bank's most recent annual report, in May 1982,
concluded that the socioeconomic costs of a slowdown
in industrialization in terms of unemployment and
unfinished projects would be so great that the govern-
ment should press ahead with its development efforts
despite the deterioration in the current account. The
Bank considered prospects for recovery in Indonesia's
traditional export markets and for boosting crude oil
output promising enough to make such a recommen-
dation. Although the Bank warned that any shortfall
from its assumptions would require some downward
revision in its projections, we believe the assumptions
are excessively optimistic, particularly with respect to
crude oil output. The Bank assumed output would
climb steadily to nearly 1.8 million b/d in 1983 and
2.0 million b/d by 1990-projections well above our
estimate of maximum sustainable capacity of 1.6
million b/d. The Bank also projected recovery in
nonoil exports to begin in late 1982, a prospect that
subsequent developments have dimmed.F__1 25X1
The Government's Response
Jakarta has floated the rupiah this year, permitting a
modest 5 percent depreciation since November 1981
to encourage exports. It also moved aggressively on
two other fronts-the budget and export promotion-
with promising, though limited, results. Bolstered by
the recommendations of the World Bank, however,
government planners up to now have shown no will-
ingness to risk slowing the industrial development
program by slowing imports, over 75 percent of which
are capital and intermediate goods. International
bankers also remain willing to lend to Indonesia at
more favorable rates than to most Third World
countries; in April 1982, Jakarta obtained a $300
million syndicated loan at 0.38 percentage point ove25X1
LIBOR (London Interbank Offered Rate), the best
spread it obtained in the 1979-80 boom years.
During the past several months, Jakarta has contin-
ued to shop around for the best possible terms.
According to a September press report, Bank Indone-
sia Governor Rachmat Saleh met with major Western
banks to discuss terms of a possible $300-500 million
general purpose loan. The US Embassy in Jakarta
reported in September that Bank Indonesia "seems
obsessed with obtaining a 3/8 percent spread over
LIBOR." Although recent press reporting indicates
that foreign banks would prefer to tie part of any loan
to LIBOR and part to the US prime rate, which
currently is 1 to 2 percentage points over LIBOR,
Jakarta obtained a $250 million 10-year loan at its
desired terms. Furthermore, Jakarta continues to
maintain close contact with foreign bankers and
undoubtedly is monitoring their attitudes toward in-
creased lending.
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growing number of strikes.
The Budget-Investment Over Consumption
In a speech in November 1981, Finance Minister Ali
Wardhana warned of the need for budget austerity.
price increases averaging more than 60 percent were
imposed on the eve of Soeharto's budget speech in
January 1982 rather than waiting for the start of the
fiscal year on 1 April. In the budget message, Soe-
harto announced other, surprisingly austere, belt-
tightening measures. For the new fiscal year, total
government spending was pegged to rise only 12
percent, considerably slower than the 45 percent and
19 percent increases of the previous two years. A 34-
percent jump in development spending was made
possible only by slashing subsidies for fuel, food, and
fertilizers, freezing government civilian and military
wages, and cutting other current outlays.
In addition, Soeharto announced plans to tighten tax
administration, a potentially painful reform for both
domestic and foreign investors, which Jakarta seems
determined to implement. Implementation will proba-
bly be slow because of Indonesia's shortage of compe-
tent administrators, but Finance Minister Wardhana
has made several speeches revealing his intention to
push efforts to improve corporate income tax adminis-
tration to spread the tax burden more efficiently and
equitably throughout the industrial and commercial
sectors.
So far, the austerity moves have not generated any
concerted opposition, although the number of strikes
is nearly double the total in 1981. Additional tighten-
ing, such as further cuts in consumer fuel subsidies,
import cutbacks, or a devaluation, in our view runs
the risk of increasing popular dissatisfaction with
rising consumer prices, slower job creation, or even
increasing unemployment in construction and other
industries affected by the government's actions. Be-
sides the perennial possibility of anti-Chinese urban
Trade Promotion
Speeches by leading technocrats in late 1981 on the
deterioration in nonoil exports helped to convince
Soeharto to introduce a comprehensive set of export-
promoting measures in January, including long-over-
due policy reforms that we believe go a long way
toward reducing the antiexport bias of Indonesia's
current tax and regulatory systems and could in time
strengthen Indonesia's export performance. The
measures are designed to diversify Indonesia's exports
away from oil by easing payment and credit terms for
nonoil commodities, reducing export credit interest
rates, and simplifying customs and port procedures.
Although the financial measures provide incentives to
export, we believe reform of the notoriously corrupt
Customs Service almost certainly is falling short of
the government's goal.
In another move, the government announced a contro-
versial new counterpurchase policy which, according
to press and Embassy reports, has met with strong
disapproval from Indonesia's leading foreign trading
partners and suppliers. Under this arrangement, a
disguised barter technique similar to methods used by
European Communist and Third World countries that
pay for their imports with goods rather than cash,
foreign suppliers would be obliged to accept Indone-
sian goods equivalent in value to their sales to
Indonesia. US and West European companies have
complained that the scheme gives an unfair advantage
to Japanese firms that have ties to large Japanese
trading firms. One result of the scheme could be to
push up the cost of investment projects, if suppliers
simply raise their prices to cover the cost of disposing
of Indonesian goods they otherwise would not buy.
Thus far, no major project has been delayed by the
new policy, but Jakarta has had only limited success
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in implementing it. Foreign firms operating in Indone-
sia recognize that apparently rigid policies can often
be softened by negotiations. Consequently, they are
taking a cautious approach in making offers until they
have a clearer view of how Jakarta intends to imple-
25X1 ment this policy.
Since January, the government has announced several
maritime restrictions aimed at boosting Indonesia's
foreign exchange earnings at the expense of foreign
shipowners. Jakarta has issued directives restricting
government-financed cargoes to Indonesian-owned
ships, a move that could affect up to 50 percent of
Indonesian imports from the United States alone. The
government is also proposing to lower port fees for
Indonesian ships, but foreign steamship companies are
protesting this action as discriminatory and several
OECD governments are negotiating with Jakarta.
Jakarta is also continuing efforts to bypass Singapore
as a transshipment port by prohibiting steamship
companies from charging higher freight rates for
cargoes shipped from Indonesian ports than from
25X1 Singapore.
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Tough Choices Ahead
An August press report based on leaks from Indone-
sian Cabinet meetings indicated that government
officials are debating whether to devalue the rupiah,
an option reportedly gaining favor with leading tech-
nocrat Widjojo, Soeharto's chief economic adviser. In
his August Independence Day speech, however, Presi-
dent Soeharto sought to stem devaluation rumors by
saying such a move is not necessary at present and
that the exchange rate would continue in a controlled
float, a choice that enables Jakarta to permit a
gradual depreciation of the rupiah.
With official foreign exchange reserves equivalent to
about three months imports, Indonesia can withstand
a short-lived slump in exports. We believe, however,
that export prospects in the next year or two are not
very promising. We estimate oil exports would do well
to recover to 1981 levels. LNG exports will remain
less than one-fifth of the value of oil exports until
LNG plant expansions are completed by the mid-
1980s. Nonoil export prospects are clouded by the
likelihood of sluggish growth in demand for tradition-
al exports.
Without a slowdown in import growth, we believe
further deterioration in Indonesia's financial position
will lead foreign lenders to demand larger spreads on
loans. If the austerity and export promotion measures
already taken are not effective in strengthening Indo-
nesia's financial position, we believe Soeharto will cut
import growth by stretching out the industrial devel-
opment program to avoid a financial crisis even
though this policy will weaken the economy's ability
to absorb the nearly 2 million new entrants to the
labor force annually, and almost certainly will con-
tribute to growing popular discontent. F__725X1
We believe Soeharto will slow construction of some
large industrial projects, such as the expansion of steel
and aluminum plants and construction of new petro-
chemical projects. He probably will not slow the LNG
plant expansions because of their immediate impact
on foreign exchange earnings. Even so, the long lead
times involved in the industrial development program
could postpone the financial impact of a decision to
slow imports by as much as a year. F__~ 25X1
We believe Soeharto will put financial considerations
ahead of politics because he is confident that the
security apparatus is capable of quelling any outbursts
of public anger that may arise in the near future.
Economics Minister Widjojo told US Embassy offi-
cials in September that Jakarta needs to take advan-
tage of the current situation to rethink its priorities
and plans. The Embassy also reported that some
prominent Indonesian officials are asserting that the
current world recession demonstrates the futility of
export-oriented, labor-intensive development.
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Soeharto's decisions to raise domestic fuel prices 60
percent and to announce a government wage freeze
last January four months before parliamentary
elections-suggest that he is willing to take the
austerity measures necessary to avoid the pitfalls
other LDC borrowers have fallen into. Nonetheless,
he will be under strong pressure to expand govern-
ment spending for both development and welfare even
while the world recession continues to tighten the
government's financial resources. There is a danger
that these pressures, combined with an overly opti-
mistic view of export prospects and his commitment
to Indonesia's industrial development program, could
lead Soeharto to overspend. Developments such as
the following would signal that Soeharto might be
moving away from prudent financial management
and that Indonesia could be in danger of a financial
crisis in the not-too-distant future:
? Downgrading the role of chief economic adviser
Widjojo and other leading technocrats because of
policy disputes with Soeharto's military and politi-
cal advisers.
? Further deterioration in the country's export
performance unaccompanied by a slowdown in the
country's ambitious industrial development pro-
gram or in imports.
? Any significant relaxation of the austerity meas-
ures taken in 1982 or, indeed, a failure to further
reduce domestic fuel subsidies.
External or sudden and unexpected developments
over which Jakarta has no control would also throw
Indonesia's financial planning into turmoil. These
could include:
? A sharp drop in international oil prices.
? A concerted move by international bankers to cut
back sharply on lending to all Third World
countries.
? A failure of Indonesia's 23-million-ton rice crop
that would require massive imports.
? A further downward spiral in world economic
activity.
Further deterioration in the current account and in
foreign exchange reserves, or a sharp rise in external
borrowing without improved exports would suggest
that Indonesia is living beyond its means. In that
case, foreign banks and international financial insti-
tutions such as the IMF and the World Bank would
almost certainly demand politically painful austerity
measures as the price for additional assistance.
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Appendix
Frictions With the United States
Overall economic relations between Indonesia and the
United States are not likely to change drastically in
the next few years. US aid and investment will remain
crucially important to Indonesia. US firms produce
over 80 percent of Indonesia's crude oil and all of its
LNG. US firms also have major investments in
forestry, rubber, mining, manufacturing, banking,
and financial services. US capital, technology, and
management expertise will continue to be needed in
25X1 the development of important sectors of Indonesia's
economy, particularly the oil industry.
Nonetheless, given the prospect of sluggish export
growth, frictions with the United States are likely to
arise over a number of issues. Indonesian officials
have already expressed their disappointment with US
positions on Third World issues, especially on export
commodities important to Indonesia. They have com-
plained that US tin sales are depressing international
tin prices and US ceilings on imports of Indonesian
textiles are contradictory to our avowed adherence to
free trade principles. If Indonesia's external accounts
do not improve, Jakarta can be expected to be more
assertive in seeking to boost its exports or finding
ways to increase its share of export earnings that now
accrue to multinational firms operating in Indonesia.
Efforts by Pertamina to secure a larger share of oil
revenues will cause disputes with US oil companies.
In the most important negotiation currently under
way-talks with Caltex over conversion of its Con-
tract of Work to a Production-Sharing Contract in
November 1983-Pertamina has adopted a three-
tiered approach to boost its share of Caltex's output
without damaging the exploration climate for other oil
companies. Pertamina chief Judo Sumbono an-
nounced that the standard 85-15 percent production-
sharing formula would apply only to the first 150,000
b/d of crude oil output. The ratio would rise to 90-10
percent for the next 100,000 b/d, and to 95-5 percent
for amounts in excess of 250,000 b/d. Sumbono said
that no single Pertamina contractor had yet reached a
production level over 150,000 b/d except Caltex,
which produced 700,000 b/d in 1981. According to
official Indonesian statistics, the next three leading
producers were Inpex, a Japanese consortium
(140,000 b/d) Arco (128,000 b/d), and IIAPCO
(112,000 b/d) 25X1
Indonesian officials had said previously that they
intended to obtain a better deal from Caltex than the
standard 85-15 percent production split currently in
force for all the other production-sharing contractors.
The three-tiered approach is intended to avoid repeat-
ing the drop in exploration that occurred after 1976
when Jakarta unilaterally changed all the production-
sharing contracts. At that time, Jakarta forced all the
oil companies to change the terms of their contracts
from 65-35 percent in its favor to 85-15 percent in an
effort to boost Indonesia's oil income in the wake of
Pertamina's near bankruptcy. The result was a three-
year decline in exploration until turmoil in the Middle
East and new contract sweeteners offered by Jakarta
once again made Indonesia attractive to foreign oil
companies. 25X1
Besides the Caltex negotiations, however, oil compa-
nies are concerned about Pertamina's hardening atti-
tude in other contract disputes. Arco, for example,
was forced to stop producing crude oil in an onshore
East Kalimantan field and relinquish its block when
Pertamina determined that the field was too small to
25X1
25X1
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