Foreign investors have increased holdings of government bonds by IDR 96.45 trillion (approx. USD $7.4 billion) between the start of 2016 and Wednesday 20 July 2016. In total, foreigners now hold IDR 654.97 trillion (approx. USD $50 billion) worth of Indonesia's government bonds. This reflects strong investor appetite for (relatively) safer state assets amid economic uncertainties related to looming monetary tightening in the USA, the Brexit issue and sluggish global economic growth, but it also shows that foreign investors have confidence in Indonesia's fiscal fundamentals.

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In anticipation of the Financial Services Authority's new policy, Indonesian banks categorized under BUKU III claim to be ready for a lower net interest margin (NIM). NIM is the difference between interest income generated by banks and the amount of interest paid out to the lenders. BUKU (Bank Umum Kelompok Usaha) is a categorization system, designed by Bank Indonesia, that divides Indonesian banks into four categories based on the banks' capital. Banks categorized under BUKU III have capital between IDR 5 trillion (approx. USD $373 million) and IDR 30 trillion (approx. USD $2.2 billion).

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The Indonesian government targets to narrow the budget deficit to between 1.9 and 2 percent of gross domestic product (GDP) in 2016 from a projected budget deficit of 2.2 percent of GDP in 2015. Indonesian Finance Minister Bambang Brodjonegoro said on Monday (06/07) that in 2016 the government will continue to prioritize spending on infrastructure development as well as energy and food. President Joko Widodo is scheduled to officially announce the 2016 State Budget in a speech in front of parliament on 16 August 2015.

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Fuad Rahmany, Director General of Taxes at the Indonesian Finance Ministry, said that state revenue from taxes will not achieve the target that has been set in the Revised 2014 State Budget (APBNP 2014). Rahmany expects that only 94 percent of the target, or about IDR 1,008 trillion (USD $84 billion) will be achieved (this figure excludes import duties and excise duties). Classical problems that cause Indonesia’s low tax-to-GDP ratio include low tax compliance, the low number of tax officials, and weak government coordination.

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The Budgetary Committee of Indonesia’s parliament announced on Monday (22/09) that it proposes the government to spend 1.6 percent less on energy subsidies in 2015. Originally the government allocated IDR 363.5 trillion (USD $30.4 billion) for energy subsidies (which involves fuel and electricity subsidies) in 2015, up from IDR 350.3 trillion (USD $29.3 billion) in 2014. This would be good news for president-elect Joko "Jokowi" Widodo as he would imply have more fiscal room for his reform programs.

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Nanang Hendarsah, Deputy of Bank Indonesia’s financial task force, said that the central bank of Indonesia will issue two new regulations this week in an attempt to boost foreign exchange (FX) transactions in Indonesia by simplifying the bank’s previous regulations issued in 2005 and 2008 (PBI No. 10/28 on FX purchase at banks and PBI No. 10/37 on netting restrictions). Recent data from Bank Indonesia show that the amount of FX transactions in Indonesia has been lower compared to those recorded by its regional peers.

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Soon-to-be president of Indonesia Joko Widodo (popularly known as Jokowi) stated that he intends to cut the large fuel and electricity subsidies once in office. Indonesia’s Revised State Budget of 2015 (RAPBN 2015) allocates IDR 363.5 trillion (about USD $31.2 billion) to energy subsidies. This figure accounts for about 18 percent of total government spending (IDR 2,019.9 trillion) set for 2015. Although the energy subsidies aim to support the poorer segments of Indonesian society, they cause complex problems in Southeast Asia’s largest economy.  

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The structure of tax revenue in Indonesia has not changed in the past decade resulting in the country’s still low tax-to-GDP ratio of between 12 and 13 percent. Emerging countries such as Indonesia typically have a low tax-to-GDP ratio as the government’s financial management is inadequate (and plagued by corruption). However, it is important for Indonesia to raise this ratio in order to have more funds available to finance the budget deficit, infrastructure development, healthcare, education and other social programs to combat poverty.

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A new financial management system was launched in April 2015 by the Indonesian government. This new system, called Sistem Perbendaharaan dan Anggaran Negara (abbreviated SPAN), aims to enhance public efficiency, transparency and accountability in Indonesia by managing the financial transactions of more than 24,000 government spending units in all 33 provinces. According to a new World Bank story, Indonesia's new financial system has managed to improve efficiency, transparency and accountability. Moreover, it improves budget planning and spending.

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One strategy of Indonesian President Joko Widodo to generate more state revenues in order to enhance investments in social and economic development of Indonesia is by improving the country’s tax collection system. As the middle class as well as number of companies that are active in Indonesia has risen rapidly in recent years, it is disappointing that tax collection targets are rarely met in Southeast Asia’s largest economy: tax compliance is low, while corruption among civil servants (tax collectors) remains a structural problem.

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In the past days, Indonesia’s fuel subsidy policy has been in the spotlight of Indonesian media continuously. When it was reported that incumbent President Susilo Bambang Yudhoyono (SBY) and newly elected president Joko Widodo would meet on the island of Bali this week to discuss various transitional matters, speculation emerged that the country’s generous fuel subsidies, which seriously burden the government’s budget as well as current account, might be wound down before the new government is inaugurated in October 2014.

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