Fiscal Credibility Indonesia Supported by Tax Amnesty Program

About a month ago the Indonesian government revised the government budget deficit up to 2.35 percent of the nation's gross domestic product (GDP) - or IDR 296.7 trillion (approx. USD $22.6 billion) - in the Revised 2016 State Budget, up from the previous 2.15 percent of GDP estimation set in the original 2016 State Budget. The widening deficit is due to lower oil prices and weaker-than-estimated tax revenue in the first half of the year.

On the one hand this can be interpreted positively as the government decided to allow a higher budget deficit rather than drastically cutting its infrastructure and social development budgets. On the other hand, the widening budget deficit causes some anxiety because the deficit is becoming closer and closer to the maximum limit of 3 percent of GDP. Earlier, officials stated that the government will issue new government bonds (IDR 364.8 trillion) this year and seek additional foreign loans (IDR 2.5 trillion) to fund this deficit.

A law implemented in 2003 stipulates this maximum 3 percent of GDP limit for the government budget deficit (this was part of the nation's prudent fiscal policy management after having experienced the traumatic experiences of the Asian Financial Crisis in the late 1990s). It remains unclear, however, what the exact consequences are for the government in case this cap is breached (in media it has previously been speculated that Indonesian parliament could decide to launch an impeachment bid). In any case, it would bring a high degree of uncertainty, and uncertainty is something that is disliked by investors.

However, strong (foreign) inflows into government bonds indicate that investors are not too concerned about Indonesia's widening budget deficit. It is indeed unlikely for the budget deficit to surpass 3 percent of GDP (as the government will surely cut spending programs on time) but there also seems to be a high degree of optimism brought about by Indonesia's tax amnesty program. Since this program was approved by Indonesia's House of Representatives (DPR) in late-June, capital inflows into Indonesia have risen significantly.

Foreign Inflows into Indonesian Stocks & Government Bonds:

Year	Foreign     Net Buy/Sell Indonesian Stocks	Foreign Ownership Indonesian Government                Bonds
2012	+15.88	270.52
2013	-20.65	323.83
2014	+42.60	461.35
2015	-22.58	558.52
2016¹	+21.88	654.97

^{in IDR trillion
¹ Up to 21 July 2016
Sources: Indonesia Stock Exchange & Directorate General Of Budget Financing and Risk Management (DJPPR)}

Although it is difficult to estimate the amount of funds that are to be generated by the tax amnesty program, the government remains optimistic that it will cause the repatriation of IDR 1,000 trillion (approx. USD $76 billion) worth of offshore assets currently stashed in so-called tax havens as well as IDR 165 trillion (approx. USD $12.6 billion) worth of additional tax income. Meanwhile, Indonesia's central bank (Bank Indonesia) is a bit less optimistic and put its forecast at IDR 60 trillion (in additional tax income), while many analysts put their forecasts a bit below the central bank's estimate. Overall, even if analysts are correct in this case, additional state income generated by the tax amnesty program will still manage to give a solid boost to state income and helps to fund the government's budget deficit.

Additional state income generated through the tax amnesty program is important because Indonesia's tax revenue realization in the first half of 2016 was disappointing. According to the latest data, Southeast Asia's largest economy collected only 33.7 percent of total targeted tax revenue in full-year 2016 during the first six months of the year. This disappointing performance is mainly due to weak tax income from the oil and gas sector.

Indonesia's Tax Revenue Target and Realization 2008 - 2016:

	2008	2009	2010	2011	2012	2013	2014	2015	2016
Target (in IDR trillion)	534.5	597.5	661.4	878.7	885.0	995.2	1,072.4	1,294.3	1,347.8¹
Realization (in IDR trillion)	607.4	563.2	650.0	872.6	835.3	916.3	985.1	1,055.6	364.1²
Balance (in IDR trillion)	72.9	34.3	11.4	6.1	49.7	78.9	87.2	238.6

^{¹ Revised 2016 State Budget
² Realization in the January-May 2016 period
Source: Investor Daily}

Besides funds generated from additional bonds, the tax amnesty program and foreign loans, Indonesia can also rely on last year's accumulated budget surplus (locally known as Saldo Anggaran Lebih, or SAL). It consists of "left-over" funds from the 2015 budget, amounting to IDR 107.91 trillion (approx. USD $8.2 billion). According to Finance Ministry official Marwanto Harjowiryono, SAL can be used to plug the budget deficit in 2016 provided that the government's bond issuance target has already been achieved.

The Indonesian government targets to see a 5.3 percent (y/y) economic growth pace in 2016, up from the six-year low of 4.8 percent (y/y) in 2015, supported by rising household consumption and stronger investment. However, most analysts (including those working at the International Monetary Fund and World Bank) expect to see Indonesia growing slightly below the government's target.

Indonesian State Budgets:

	Revised State  Budget 2016	State Budget        2016	Revised State  Budget 2015
A. Total State Income	1,786.2	1,822.5	1,761.6
I. Domestic Income	1,784.2	1,820.5	1,758.3
II. Grants	2	2	3.3
B. State Spending	2,082.9	2,095.7	1,984.1
I. Central Government Spending	1,309.6	1,325.6	1,319.5
II. Transfer to Regions	776.2	770.2	664.6
C. Budget Deficit	296.7	273.2	222.5

^{in IDR trillion
Source: Indonesian Finance Ministry}

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