Government of Indonesia
On Tuesday, Indonesia’s (Baa3 stable) parliament approved a tax amnesty bill. The move is credit positive, as it underscores President Joko Widodo’s continued commitment to reform, and marks the first significant step to offset the impact of low oil prices and softening growth on government revenues. We expect a positive effect on revenues, but the likely uptake rate and the extent of the boost to income cannot yet be reliably estimated, given uncertain global conditions and partly because the bill does not specify enhanced enforcement mechanisms, such as higher penalties for non-compliance.
Weak government revenue is a key constraint on Indonesia’s fiscal strength and the sovereign’s overall credit profile. At 13.0% of GDP in 2015, Indonesia’s government revenue is the lowest among investment grade countries. Total government revenue dropped 1.7% as a proportion of GDP in 2015, largely due to shrinking oil and gas receipts (see Exhibit 1). There are just 27 million registered taxpayers out of a population of 255 million, according to Ministry of Finance estimates. Of those, only 10 million pay income tax in full every year, while the government acknowledges that tax evasion is a major constraint to revenue generation.
The amnesty scheme, which will run through March 2017, will charge individuals a penalty of 4% to 10% on assets, depending on how soon they declare them (Exhibit 2). If holders repatriate their assets, the rate will halve. Companies will pay between 0.5% and 2.0%, depending on the size of the firm and the amount of assets it declares. Repatriated funds will have to remain in Indonesia for at least three years, and be invested as specified by the Ministry of Finance, including in government bonds and government infrastructure projects.
The government estimates that the amnesty will boost its revenues by IDR165.0 trillion ($12.5 billion, 1.3% of GDP) by the end of 2016. This would give the administration more flexibility to expand fiscal spending to support the economy without breaching its legal deficit ceiling of 3.0% of GDP. In 2015, the fiscal deficit widened to 2.5% from 2.1% a year earlier, while the economy expanded 4.8%, its slowest rate since the global financial crisis.
Also on Tuesday, Indonesia’s parliament approved a revised budget with a deficit of 2.35% of GDP, up from 2.15% previously. This incorporates a lower oil price assumption of $40 per barrel, compared to $50 in the original budget. The government will cut diesel subsidies to IDR500 from IDR1,000 per liter from July 2016, furthering measures to reduce subsidy spending that it kicked off in late 2014. In addition, the revised budget provides for increasing the capital of 21 state-owned enterprises to support infrastructure development.
Besides boosting revenues, inflows from the tax amnesty will help to protect Indonesia against external pressures, at a time when global capital flows have been increasingly volatile. The country’s current account deficit narrowed to 2.1% of GDP in 2015 from 3.1% a year earlier, on weak commodity prices – Indonesia is a net energy importer – and subdued domestic demand. Any investment of repatriated assets into government bonds could mitigate the risks stemming from the large proportion of the government’s local currency debt that foreigners hold, currently over 40%.