Indonesia: Tax measures and strong trade add to resilience
- 2021 fiscal deficit might be narrower than the budgeted target
- The parliament approved a host of tax measures, which is expected to give a fillip to 2022 revenues
- Strong export performance will limit the scale of current account slippage
- Implications for markets: Healthier fiscal and external balances are supportive of bonds and IDR
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.
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