Indonesia's Policy Activism

Recently, I met with a broad mix of corporations, bureaucrats and private sector commentators in Indonesia’s bustling capital city of Jakarta. The clear common thread to emerge was the increased policy activism by the Indonesian government, including one to increase tax collection—primarily by implementing a tax amnesty on undeclared/offshore assets held by Indonesians—and another to reduce commercial bank lending rates to single digits by the end of the year.

Tax Amnesty on Undeclared Assets

The Indonesian government’s pursuit of increased taxes to fund its deficit, which is constitutionally capped at 3% of GDP, has caused disruptions in consumer and business activity. Spending on expensive durable items and residential property has fallen significantly, despite relatively low household indebtedness. This has occurred as consumers try to avoid scrutiny by the internal revenue (tax) department, which has actively attempted to reconcile credit card spending and housing purchases with income and asset declarations on annual tax filings. A local commercial bank reports that credit cards are being returned at a rapid rate while daily credit card activity fell 10.6% in April compared to March following the Finance Ministry’s instruction to banks to provide the tax office with access to credit card transaction information.

The tax amnesty bill is now expected to pass in Parliament shortly, and is expected to ease the logjam in spending. Declarations of previously undeclared assets or repatriation of undeclared foreign assets would clean the slate for taxpayers with no penalty beyond the levies under the law (these could range from 1%-15%, depending on the outcome of an ongoing debate in Parliament). Apart from freeing up consumer spending, this would raise tax revenue, helping to support public investment spending. However, the government’s estimate of US$12.3 billion in additional tax revenue seems optimistic, as most locals do not expect significant repatriation of funds. Lower revenue gains would be insufficient to bring the budget deficit below the 3% cap unless deeper spending cuts were to be made. This suggests that public spending may slow down during the second half of the year.

Reduction of Bank Lending Rates to Single-digit Levels

According to Indonesia’s Financial Services Authority, OJK, the directive to reduce lending rates to single digits is aimed at supporting small- and medium-sized businesses. OJK believes that reducing deposit (funding) costs, which are capped at a rate linked to the central bank’s policy rate, will lead to lower lending rates. To this end, rates on Finance Ministry deposits at state banks will be capped, and the directive may be widened to include deposits for all state-owned enterprises (SOEs). Given the large size of SOE deposits, this could materially impact deposit rates. A consequence of this could be that SOE depositors choose to park funds in higher yielding government bonds, taking funds out of the deposit system at a time when deposits are already increasing at a slow pace.

Despite these concerns, medium-term prospects for the economy continue to appear sound, with low inflation providing scope for lower interest rates, a slew of infrastructure projects worth US$550 billion between 2015 and 2019, a clean household sector balance sheet, reforms to support business activity, improvements in governance (anti-corruption crackdown and pro-poor policies aimed at uplifting the base of the population), and a president (Joko Widodo) who is consolidating power.

Sriyan Pietersz
Investment Strategist, ASEAN
Matthews Asia

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