Tax measures to add buoyancy
The Indonesian parliament approved a host of tax measures last week. The measures were aimed at compensating for weak collections and higher spending demands due to the pandemic. Key upcoming changes include:
• Value added tax (VAT): A phased increase in the VAT rate – a 1% hike to 11% in April 2022 and to 12% in 2025, instead of a bunched-up increase. Add to this, basic goods, and services (rice meat, public transport, health etc.) will continue to be exempted. The decision to retain these exemptions and a phased increase in the VAT rate will make it less onerous on consumers as the economy continues to recover from the Covid-driven slump. These VAT collections made up a quarter of overall revenues last year and are up 18% yoy by Aug21. Our estimates suggest than 1% hike in the VAT rate could potentially raise revenues by IDR45-50trn i.e., ~0.2-0.3% of GDP, whilst the impact on inflation is likely to be modest as most essentials goods and services are exempt. Energy subsidies have also been maintained which has limited the passthrough of the rally in global energy prices.
• New income tax bracket: A new income tax bracket for individuals earning more than IDR5bn/annually (US$345mn) has been introduced. Add to this, the threshold for the lowest band (of 5%) will be raised by IDR10mn to IDR60mn. The current framework has four brackets, from 5%-30%.
• A fresh tax amnesty scheme will be launched for Jan-Jun 2022 period, along the lines of the one launched back in 2016. Indicatively, assets acquired until 2015 will be subject to 6-11% tax rate and those 2016 onwards will be higher at 12-18%. Few sectors will be exempted.
To recall, during the first tax amnesty in 2016-2017, the declaration of assets had beat the targeted IDR4000trn to reach IDR4642trn by late Mar17. Repatriation of funds were at ~15% of the targeted IDR1000trn at IDR146trn .
• Delay in the next tranche of corporate tax cut: The scheduled next leg of reduction in the corporate tax rate to 20% has been put on hold, and will remain at 22%, which has been the prevailing rate since 2020, when it was lowered from 25%.
• Carbon tax of IDR30k/ metric ton ($2.1) will be imposed, down from the earlier proposal of IDR75k/mt and starting with coal power plants. Taking a calibrated approach towards this tax reinforces the larger preference to raise more revenues but balance the hike with its impact on economic activity. The scale of this tax is smaller than $3.7/mt imposed by Singapore and range of $30-70/mt by selected European countries, according to estimates cited by Bloomberg. A meaningful lift to revenues is likely when either the tax rate is raised, or expanded to more industries.
Before discussing 2022, we take stock of this year’s math. Jan-Aug21 fiscal deficit has registered -2.3% of GDP, less than half of the full-year target (-5.8%), helped by higher resource-based revenues and slower disbursements.
Under revenues, few factors have helped: a) this year’s restrictions were less stringent than a national lockdown, allowing most businesses and industries to stay open, albeit with lower manpower, underpinning tax revenue growth; b) custom & excise revenue realization rose sharply; c) higher imports resulted in an increase in duty collections; d) pick-up in non-tax revenues – 93% of budgeted amount reached by Aug – particularly resource-based, especially on copper and palm oil; e) better due diligence. Concurrently, under expenditure, spending is lagging budgeted targets. A case in point is disbursements towards the pandemic stimulus program (PEN) as shown below.
Pulling all these factors in, we assume that a late catch up will push spending to 85% of the budgeted target and revenues remain firm, the full-year fiscal deficit might narrow by 40-60bps vs targeted -5.8% of GDP.
Into 2022, revenues are likely to get a boost from the proposed tax reforms depending on when these are implemented. With revenues are budgeted to rise a modest 0.4% in 2022 (see table), we suspect that a potential boost from fresh measures hasn’t been factored in.
The government estimates that tax revenues might rise by ~IDR139.3trn (0.8% of GDP) next year and address one of the economy’s soft spots i.e., weak tax revenue to GDP ratio, from the current 8.4% of GDP to 9.2%. Higher collections not only increase the likelihood that the 2022 deficit realisation might be better than the budgeted -4.85% of GDP, but also revives the glide path to -3% of GDP by 2023.
Strong trade cushions current account math
Indonesia returned to a current account deficit this year after two quarters of surplus in 2H20. In first half of 2021, the current account registered a deficit of US$3.9bn, propped by the doubling in the goods trade surplus to US$15bn, but offset by a wider services deficit (higher import freight payments) and shortfall in the primary income. To recall, the August trade surplus had widened to a record high of US$4.7bn, with exports expected to continue to stay firm on higher commodity shipments (coal, metals, palm oil etc.), while imports also rise on a higher oil & gas bill.
Factoring in a trade surplus for 2021 of ~US$28bn, a wider shortfall in services and deficit in primary income, we expect the full year current account deficit to widen to -1.0% of GDP. Despite a wider gap, levels will be at a third of the deficit during the taper tantrum back in 2013.
Foreign reserves were up to a record high of US$146.9bn in September, helped by an external debt withdrawal in the month, higher inflows, and surplus receipts, with the IMF’s new SDR allocations also boosting the figure. The current stock is equivalent of nearly 9months of import cover, well above the adequacy need of 3months. We expect further accretion by end-year, on account of capital inflows and trade surpluses, helping to cushion against the risk of higher global volatility.
An improved fiscal outlook, lower financing needs and narrower current account deficit balance have been supportive of the government bond price action and the IDR. The tilt in the IDR bond ownership towards higher domestic ownership has helped to lower the vulnerability of the bond market, added to the central bank’s assurances of a ‘burden sharing’ arrangement this year and the next. As highlighted in Indonesia: Monetary-fiscal mix for growth and stable IDR, our FX Strategist is of the view that the USDIDR to be stable between 14000 and 15000 per USD into 2022.
The information herein is published by DBS Bank Ltd and/or DBS Bank (Hong Kong) Limited (each and/or collectively, the “Company”). It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies. The information herein is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation. The information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation.
This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) which is Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd and/or DBSVS, may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at [email protected] for matters arising from, or in connection with the report.
DBS Bank Ltd., 12 Marina Boulevard, Marina Bay Financial Centre Tower 3, Singapore 018982. Tel: 65-878-9999. Company Registration No. 196800306E.
DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability. 18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.
DBS Bank (Hong Kong) Limited, a company incorporated in Hong Kong with limited liability. 11th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.