Massive QE fom Japan & Europe and emerging trend of negative interest rates policy have surely flooded the world with immense liquidity. But inflation is still absent eventhough oil price is close to $50/barrel. Various kinds of fund managers around the world are also sitting on the sideline at the beaches of Cayman Islands, making one of the most favourite tax haven countries the 3rd biggest holders of US Treasury after China and Japan. They are waiting for the Fed which turned strongly hawkish this week from reasonably dovish in April 2016 meeting and of course the Brexit story.

The World is Old

Talking about the fundamental problem of this stubborn deflation the world is facing, i say the main problem is in demographic issue. Aging population (advanced countries) is definitely hurting the economy so bad. There is no point if GDP per capita of a country keeps increasing while its people are getting older which translates in lower MPC (marginal propensity to consume) and automatically higher MPS (marginal propensity to save). It’s not that companies and consumers don’t have the money, any kind of stimulus are being done by the governments (fiscal) and central banks (monetary) all around the world. They are just to pessimistic on the future economy that stops them from investing (I) and most importantly consuming (C). When consumption (C) and investment (I) keep going down, the government spending (G) has to offset the two otherwise the GDP is going down, which is what we are seeing right now. People with resources don’t want to consume while people who want to consume don’t have the resources.


Q1 2016 earnings release are pretty much done. Banking industry has not stop bleeding. Although NIM and total revenue generally improve, NPL and bad debt write off increase. Many believe that bank’s profitability will continue to suffer despite increasing loan growth post 7day reverse repo implementation. Government is also expected to have the budget deficit widen because tax revenue is pretty far from the target. This will mean more bonds issuance and spending cut. It’s not surprising that SOE construction companies don’t perform very well this first quarter of 2016. So we have undelightful corporate earnings and unpleasant GDP.

S&P Upgrade & Tax Amnesty 

From trader, pension fund, central bank, to government are quite positive that Indonesia will get the investment grade status by the end of May or early June 2016. However, the party will not be that glamorous due to unexpectedly hawkish the Fed which drives the USD/IDR to 13,200ish to 13,600ish in less than a week. Brexit will obviously create volatility and should be taken into account when it comes to forecasting USD/IDR. The strongest reason Indonesia will not get the upgrade is probably due to the “twin deficits”; fiscal/budget deficit and current account deficit.

Tax amnesty is like the cinderella glass shoes that will change Indonesia in the eyes of the world. Unfortunately, her step mother and step sisters (house of representatives) are still trying every possible way to prevent it from happening. This shining glass shoes is even more important than the S&P upgrade because the money will stay longer thus will help liquidity for everyone starting from the government, banking system, private investment, even more importantly to the consumers.

Fiscal Stimulus

Second half of 2016 looks more promising than the first half. PTKP (non taxable income) increase from IDR 3,000,000/month or IDR 36,000,000/year to IDR 4,500,000/month or IDR 54,000,000/year. This is clearly a way to boost consumption espeially for the middle & low income people who represent majority of Indonesia population. Corporate tax is planned to be reduced as to boost and support private investment. These will have good fiscal multiplier effect on the economy.

Disclaimer : This note is not a research report. It doesn’t represent any company, institution, or individual. This is not a recommendation or suggestion. Information and data are collected from various public sources. Reader should be able to distinguish between fact on opinion.