APPROVED

After almost a year since the first time tax amnesty was proposed, Indonesia’s parliament finally approved the tax amnesty program. The program is expected to draw IDR 560 T ($42.5 bio) back to the country. Tax amnesty is one proof that Jokowi is getting stronger and stronger, politically and very soon, economically. JCI rallied 2.83% with IDR 7 T of foreign net buy, IDR long term govt bonds gained approx. 2-3%, while USD/IDR -1.35% in a week from 27th June to 1st July 2016. Indonesia market enjoyed a rally while markets all around the world were bleeding quite severely post BREXIT decision.

Tax amnesty will solve the biggest issue that is hindering Indonesia to achieving its dream which is financing issue. The crowding out effect will soon be eliminated as at least 30% of the repatriated funds are expected to stay for approximately 3 years in government & SOE securities, banking system will soon get enormous amount of fresh liquidity, and most importantly the ‘shadowed funds’ (legal funds that have not been declared in SPT – personal tax report) can now be used freely as they have been included into SPT.

INDONESIA STRUCTURAL ECONOMIC REFORM

GDP = G + I + C + (X-M)

GDP = Economic Growth

G = Government Spending

I = Private Investment

C = Domestic Consumption

(X-M) = Net Export (Export-Import)

So looking back at our GDP formula (expenditure approach) we know that tax amnesty program will increase :

+ G (govt spending) : The government can continue its infrastructure spending without having to worry about fiscal deficit. It will be able to create jobs, attract investment that will eventually create even more jobs, as well as stimulating domestic consumption by doing indirect subsidy (non-taxable income increased from IDR 36mio/year to IDR 54mio/year). None of the beautiful plans of Jokowi will be realized without tax amnesty.

+ I (private investment) : Domestically speaking, the ‘I’ factor is slowing not because the businessmen don’t have the money but they haven’t declared their assets fully so they can only use limited amount of their assets. Not to mention they were hunted and terrorized by aggressive tax officers for the past 2 years. Tax amnesty is very important not because of the short term tax revenue received from the penalty. The most important thing is that businessmen will now be more willing to invest in their business and spend their money in Indonesia simply because the tax issue is now eliminated.

Private sector in general will obviously benefit as banks gets great amount of fresh liquidity. Private sector will be able to get lower interest rate and probably easier to get new loans as banks are flooded with liquidity. Companies can refinance its debt and start to execute their delayed capital expenditure to expand the business which will ultimately translate to growth.

+ C (domestic consumption) : In 6-12 months time domestic consumption is expected to rise due to lower gas, electricity, and fuel prices plus the non-taxable income. Indonesia’s domestic consumption is know as the most stable as compared to other countries and its about to enter a whole new level as foreign investments come in. Consumer discretionary is probably more interesting now versus consumer staples.

+ (X-M) : Commodity prices are not expected to go back to where it were 5 years ago. Nothing has really changed from the demand side and that means Indonesia’s income from net export will not be the main contributor of its GDP growth as it used to be. I expect current account deficit to widen in a year or two due to increasing import, considering high correlation between import and GDP. I personally think that this will not matter as much as it did in 2013 because this time round it will be a healthy deficit (infrastructure spending VS fuel subsidy).

THE BEGINNING OF EM CYCLE?

I always believe that the money will always go back and forth from EM to DM, vice versa. In my opinion, this year could be the year where money flows back to EM (emerging market) from DM (developed market). Valuation wise, the EM market is somewhat cheap as they have been punished cruelly from mid 2013 until 2015. Besides, the DM recovery story is just not happening. We have the Fed that is expected to delay its rate hike to the end of the year or maybe early 2017 plus the election uncertainty. Most recently, BREXIT that has just put the European economy and political situation back to its dark times which I think is going to be darker. Japan that has been doing anything it can but achieve nothing significant.

Investors will have to look for a better place for their money to work. EM was punished because of the falling commodity prices but there is

still many opportunities especially infrastructure investment and domestic consumption, at least for India & Indonesia. I personally expect there will be more carry trade happening especially to Indonesia with its beautiful story. USD/IDR will probably be around 12,500 or even below 12,000 depending on how quick the repatriation process works and how much hot money come in.

With that said, I expect BI to intervene using its FX reserve whenever IDR strengthen too quickly or significantly. I see more room for Bank of Indonesia to expand its monetary policy by cutting another 0.25%-0.5% until the end of year 2016. This is to discourage massive foreign inflow (hot money) by narrowing down the real interest rate (nominal interest rate – inflation). Current real interest rate is approx. 3% (BI rate 6.5% – inflation 3.45%). Remember that too strong IDR is not good for the commodity based economy especially in this world currency war situation.

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.

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